Sainsbury's ‘mulled Mothercare buy’, analysts expect more bid interest

By

Sandra Halliday

Published
Apr 8, 2018

Acquisitive UK supermarkets giant Sainsbury’s has mulled a takeover bid for embattled Mothercare, according to a report last week, although neither party confirmed any talks and it’s seen as unlikely that Sainsbury’s is still looking at the chain.

But regardless of whether Sainsbury’s is interested or not, analysts think there’s a strong chance the company could come onto the market soon. 

Its cash reserves are running low and it’s looking at new financing options. If it doesn’t find them, its share price will plummet further, making it an easy target for rivals, for expansion-minded retailers and for private equity funds that might think they could turn around a slimmed-down version of the business.

The Sainsbury’s story certainly focused attention on Mothercare’s potential as an acquisition target. The Press Association said on Friday that the deals team at Britain’s second biggest supermarket operator had been looking closely at Mothercare for several months. 

The mother and baby products retailer has been in the news during this period as it has reported extremely challenging sales, plus company losses and only last week announced a new CEO just minutes after the incumbent CEO was informed he was out of a job.

No formal offer was tabled but Sainsbury’s and Mothercare’s shares both enjoyed an unaccustomed bounce as a result of the story.

Would any kind of deal make commercial sense? Possibly. Mothercare is hugely challenged at present and there are still doubts around its ability to turn itself around as an independent, listed company.

Sainsbury’s has already shown its willingness to buy under-performing business with its £1.4 billion 2016 Argos purchase and it has been steadily integrating that into its operation. It has been able to make more efficient use of its store spaces and cut down on its rent bill by closing Argos standalones and opening counters inside its supermarkets. 

However, that strategy would clash with the current Mothercare approach that has also been to close stores but to maintain and invest in experience-based standalone flagships. And there would also be Mothercare’s international business for UK-focused Sainsbury’s to deal with.

Yet mother and baby products do have very clear synergies with the groceries, homewares, household goods and affordable fashion that Sainsbury’s/Argos currently sells.

But what of interest from elsewhere? While Mothercare’s deep problems mean many businesses wouldn’t touch the chain, it could be a tempting buy at the right price. Its market capitalisation  of less that £34 million is a fraction of its value a year ago and its lenders would clearly be keen to see positive steps being taken to get some of their money back.

KPMG has been advising it on restructuring and it has been taking to Barclays and HSBC about raising its funding limits, with temporary advances until May having been agreed. Analysts also speculated that the lenders could have been catalysts in the removal of CEO Mark Newton-Jones and his replacement with ex-Kmart and Tesco exec David Wood.

For now, rather than an immediate buyout, those same analysts think a company voluntary arrangement (CVA) is more likely, allowing the firm to close stores and escape from onerous leases to ease its cash flow problems. Watch this space.