Grocery Giant Has the Chance to Steal Candy From a Baby
(Bloomberg Gadfly) -- Shares in Mothercare Plc, a British High Street institution that's seen better days, have jumped on reports that J Sainsbury Plc considered a bid. The supermarket group's interest was extremely tentative, so Thursday's 21 percent pop might amount to hope more than reality.
Nevertheless, there are sound reasons why the struggling baby goods retailer could fit with a supermarket, particularly Sainsbury. With the shift to online shopping and the competition from cut-price German rivals Aldi and Lidl, all grocers are wondering what to do with all their retail space.
Sainsbury estimated in 2015 that a quarter of its stores would have some excess space over the following five years. That will be solved in part by the 2016 purchase of Argos, but there's room for more concessions.
Toys and baby goods fit well with Sainsbury. Indeed, losing customers to supermarkets has been a perennial problem for Mothercare. While Sainsbury already sells lots of this stuff, a deal would broaden its range.
By buying Argos, Sainsbury took control of a number of brands including Habitat's home furnishings and Chad Valley's toys. Mothercare could slot into that stable.
While I've been skeptical about the Argos deal, it has at least improved Sainsbury's online expertise. Plugging Mothercare's product range into that digital offering, including super-fast delivery and click-and-collect from Sainsbury stores would be worthwhile. Mothercare has failed to keep pace with internet rivals.
What's more, at first glance Mothercare looks as cheap as a pot of baby food that's about to pass its eat-by-date. Its market value has shrunk from as much as 500 million pounds ($700 million) in mid-2015 to just 34 million pounds today. Even assuming a 30 percent premium, a supermarket could buy the shares for about 44 million pounds.
The trouble is, acquiring Mothercare would mean taking on other liabilities. It has almost 50 million pounds of net debt, as well as a pension deficit of 80.1 million pounds at March 2017. The biggest commitment is its chain of 140 U.K. outlets, all with rent obligations.
Plus it's not clear whether a supermarket would want Mothercare's large international franchise business.
Still, Sainsbury has experience in dealing with unwieldy store chains, having taken on Argos. The average lease length at Mothercare is less than five years, so there's some wiggle room.
Mothercare this week named a new chief executive. The sensible thing for him would be to shed stores and create a less encumbered business. But Sainsbury is already further down the online shopping line with its Argos purchase. If it could secure a knockdown price, investors wouldn't be spitting out their dummies.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Andrea Felsted is a Bloomberg Gadfly columnist covering the consumer and retail industries. She previously worked at the Financial Times.
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