Steinhoff's Merger Gatecrashing Is All About Amazon: Gadfly
Steinhoff International, a previously shy and retiring South African retailer, has in the past two weeks crossed France's FNAC with an unsolicited bid for Darty and Britain's Sainsbury with a counteroffer for Argos. What's this all about? Amazon.
Steinhoff's unsolicited £662 million ($926.7 billion) approach for Darty adds to its proposed £1.42 billion cash takeover for Home Retail Group and its Argos household goods arm. The moves trump FNAC's £646 million cash-and-stock bid for Darty and supermarket Sainsbury's £1.36 billion cash-and-stock offer for Argos.
Rather than being a distraction, Darty would give Steinhoff more firepower to see off Sainsbury, because the acquisition of the French retailer is likely to generate cost savings that could smooth its pursuit of Argos.
Darty generates 42 per cent of its sales from white goods such as washing machines and refrigerators. Steinhoff's Conforama furniture chain in France gives it some presence in the category, but the addition of Darty would ramp this up.
Although it is tricky to put a figure on the synergies at this stage, the extra clout that would come with owning both Argos, which had £4 billion of sales last year, and Darty, with £2.7 billion, should help Steinhoff wring better deals from suppliers. (Argos doesn't break out its sales of white goods, but it's an important part of its business).
The extra savings will come in pretty handy.
Across Europe, retailers are trying to figure out how to deal with the threat of Amazon. Just look at the deal earlier this week by supermarket Morrison to supply the US giant with hundreds of its products at the expense of Ocado, its existing online partner.
Seeing off Amazon was part of the rationale for the combination of FNAC and Darty. The two companies estimate they would have 16.1 million monthly unique visitors to their websites in France, not far off of Amazon's 17.5 million.
It’s a similar picture for Sainsbury, which estimates that with the addition of Argos its selection of non-food products would be bigger than Amazon UK's. Argos's back-office systems and logistics would help it compete with Amazon's super-fast delivery options. What's more, the combination will have over 2,000 stores – something that Amazon just can't match (at the moment, anyway).
Steinhoff could afford to buy both. It has a strong balance sheet, with debt at just 14 per cent of total equity in 2015. It is also backed by Christo Wiese, the South African billionaire, whose family trust is the company's biggest shareholder. And the combined $2.9 billion it would pay for both companies is a fraction of $21.8 billion market capitalization.
Mike Coupe, Sainsbury's chief executive, might have thought Steinhoff's decision to disrupt a second deal would make it less of a rival for Argos. The latest twist could actually make it a more dangerous adversary.
Gadfly has already argued that Sainsbury should walk away rather than get involved in an expensive bidding war. Steinhoff's cross-channel assault is the first salvo in a battle that Coupe should flee.
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