J Sainsbury PLC's (LSE:SBRY) cancelled talks with JD.com about a potential sale of Argos further confirm how the grocery business is the "main driver of value" for shareholders, said analysts.
Sreedhar Mahamkali at UBS, who raised his share price target on Friday, said the group has been focused on its Argos transformation programme to address growth and profitability challenges.
Sainsbury's made a first announcement on Saturday to confirm talks that seemed to be fairly advanced talks, the analyst said.
However, a second announcement, published on the group's website on Sunday and via the RNS systems on Monday, noted a "materially revised set of terms and commitments [from JD.com] which are not in the best interests of Sainsbury’s shareholders, colleagues and broader stakeholders", the FTSE 100 retailer said, adding that for the reason it had terminated the talks.
At the same time, the UK grocery group also noted that Argos traded in line with expectations over the summer and that half-year sales and profitability were stronger than last year.
The reasoning for engaging in the talks was "likely a natural progression" of its Argos transformation strategy, said the UBS analyst, while the brief trading statement "reassures on the continued progress of Argos" thanks to the transformation so far.
Such a quick change in the Argos talks was a "short term negative", said Mahamkali.
Sainsbury's house broker Shore Capital said that while Argos has not been the most reliable part of the business, management was "absolutely right to walk away from a potential deal that is not in the best interests of all of its stakeholders".
Profit margins at Argos have been "relatively variable and at times low in recent years," sais analyst Clive Black, not helped by a fairly weak British general merchandise market alongside variable weather conditions.
So, said Black, "we can understand why Sainsbury has been open to exploring a disposal of Argos, so permitting more focus, something that we do not believe its shareholders will be wholly surprised to see either".
Dan Coatsworth, investment analyst at AJ Bell, said the publicity around the news means "the firing gun has effectively been triggered on the sale of Argos" and while has rejected an offer from JD, "the fact it hasn’t come out and said the business isn’t for sale at any price is telling".
He said a statement that gave the impression that Chinese retailer JD’s offer wasn’t in the best interests of shareholders, staff and stakeholders. "implies the price wasn’t high enough", but also that there were no details about job guarantees and reassurance for existing suppliers.
Splitting Argos from the wider supermarket chain "won’t be easy, but not impossible", with the number of standalone Argos stores much reduced and mostly relocated as a collection point inside its grocery stores.
He said Sainsbury’s would be "unlikely to let a new owner continue operating inside its supermarket stores" so a new owner "must either rely on the remaining store estate, open more stores, or think hard about making Argos a digital-only brand".
AO was suggested as potentially interested in owning Argos as a digital-only brand to broaden its interests beyond electrical appliances, though Coatsworth acknowledged that AO already has a similar strong logistics network and a reputation for speedy service.