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With the deadline fast approaching for J. Sainsbury (LON:SBRY) to make a bid for Home Retail (LON:HOME), negotiations have reportedly hit a snag.
Shares in Argos-owner Home Retail, which closed at 142.5p on Thursday night, fell to 124.5p before recovering to 136.5p, after a report emerged that talks have stalled, with the two parties unable to agree on a price.
Supermarket group Sainsbury's has until 2 February to make a formal bid or walk away, although it could come back with an offer should a rival bidder subsequently emerge.
The Financial Times reports that Sainsbury's is refusing to budge beyond its 150p a share valuation, which would value Home Retail at £1.22bn, while Home Retail's management is holding for 170p a share.
That might be a bit on the optimistic side, according to David Jeary at Canaccord Genuity, who earlier this week cut his target price for Home Retail to 134p.
Jeary noted that the market does not know the price Sainsbury's offered last November when it was knocked back by Home Retail, but press speculation suggested it was around 130p.
“There have been three key events since then: the proposed sale of Homebase to Wesfarmers for £340mln (c 42p per share); a further profit warning from Home Retail; and market weakness and volatility. These will all play a part in Sainsbury's thinking for what it views as both a 'strategically compelling transaction' but also 'not a must do deal',” suggested Jeary.
Jeary said a bid above 135p a share values the rump of Home Retail at a premium to the retail sector and is clearly not convinced of the rationale for Sainsbury's ambition to add Argos to its retail estate.
Investec, meanwhile, said that if Home Retail is jilted at the altar then it might fall into the hands of private equity, but it said “there is a bit less to HOME than meets the eye”.
After a bit of digging, it determined that divisional profits as shown by Home Retail may have been boosted for Argos by re-allocation of the financial services arm's underlying earnings (EBIT) and that this undermines the overall valuation.
Its fundamental value per share, coincidentally, is about the same as Canaccord: 135p a share.
“We assume that Sainsbury has probably done the same work we have managed in a couple of days over the last six months. So we would expect that it does not want to double-count assets either. This said the logic of its approach eludes us so its valuation is likely to as well,” Investec's Tony Shiret concluded.
In late afternoon trading, Home Retail's shares were off 5p (3.5%) at 137.5p while Sainsbury's were up 2.6% at 242.8p.