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Home Retail Group shares rise on the back of private equity rumours

Home Retail Group logo original

Talk of a possible £1billion takeover bid for Argos and Homebase owner Home Retail Group sent its shares 5 per cent higher today, with analysts calling the bid rumours ‘justified’.

An article in The Sunday Times this weekend said that a number of private equity firms are considering making a £1billion takeover bid for the owner of the catalogue retailer and garden centre chain.

According to the paper, several retail industry figures have been asked to advise on potential bids for Home Retail in the wake of October’s profit warning from the firm, which it had blamed on uncertainty around this week’s ‘Black Friday’ promotions.

The retail giant's share price has halved since the start of the year.

Last month Home Retail said first half earnings at Argos had halved, with operating profits dropping to £6.4million in the six months to the end of August and like-for-like sales down 3.4 per cent.

The group said Argos had struggled to sell televisions, tablet computers and white goods over the summer, while there were hefty start-up costs involved in launching its same-day delivery service.

However, Homebase enjoyed a better start to the year, with earnings up 23 per cent to £34.3million after decent summer sales and cost savings.

Argos is in the middle of a major revamp to turn itself into a cutting-edge digital retailer, recently stepping up its advance against the likes of Amazon with the launch of a same-day delivery service in the UK.

The shares have sunk almost 18 per cent since that warning, at one point hitting a two-and-a-half year low and the lowest level since Argos boss John Walden took over as Home Retail’s chief executive in March 2014.

Home Retail’s share price has halved since the start of the year, with the group valued at £849million at Friday’s market close.

In lunchtime trade today, however, the stock was the top gainer on the FTSE 250 index, up 5.9 per cent, or 6.1p to 109.5p.

Freddie George, retail analyst at broker Cantor Fitzgerald said: ‘We are not surprised with the bid rumours in The Sunday Times and reiterate our BUY recommendation and our TP of 195p.’
George pointed out that he had previously estimated a break-up value for Home Retail of 266p per share

The analyst also said he had visited a number of Argos stores over the weekend, noting that: ‘Our sense is that sales particularly of toys and electricals were trading above company expectations helped by an increase in advertising, online being boosted by the Paris attacks and Black Friday offers being scheduled one week early.’

The Argos website was reported to have crashed on Friday impacted by a significant upsurge in traffic.

Independent retail analyst Nick Bubb said that ‘ahead of such a key trading period for Argos, ie Black Friday/Christmas, and after its recent problems, nobody's going to take too many chances with Home Retail and any bid approach will clearly not happen until after Christmas.

‘However, the shares have been very weak and given the strength of the balance sheet it would be understandable if private equity funds are casting an eye over it.’

Investec Securities and RBC Capital Markets also thought the fresh bid rumours for Home Retail were credible but highlighted as well that the shares are undervalued and could recover under current management.

RBC said: ‘Bid discussions tend to come and go, however we think the company's depressed valuation and potential for an alternative strategy means that the press reports cannot be dismissed out of hand.’

Investec said that the report appeared vague and that any potential bidders will likely wait until after the peak Christmas trading update.

The broker added that it continues to see Home Retail as a value play in its own right and has a buy rating and 155p target price on the stock.

Jasper Lawler, market analyst at CMC Markets, said: ‘Argos is struggling to fend off online competition and earnings look like suffering as a result.

‘A private equity sale makes sense because stores would probably get sold off to help pay for debt used in the buyout.

‘The potential for growth could be that remaining stores, if used effectively give Argos an edge over online competition with click-and-collect.’Home Retail has also embarked on a three-year plan to close about 80, or a quarter of its Homebase 323 stores, after it said consumers had 'fallen out of love with DIY'.

Source :

23 November 2015

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