Sainsbury’s (LON:SBRY) shares dropped dramatically last week after it emerged that a secret offer for Home Retail (LON:HOME), made back in November, had been rejected. But investors are a little baffled – why are Sainsbury’s so keen on getting hold of the home and DIY group?

Fortunately, Sainsbury’s released a presentation today designed to make their thought process a little clearer. It all boils down to three main reasons:

1) Safety in a declining sector

It’s no secret that supermarkets have having a tough time at the moment, and all of the Big Four are pursing strategies in order to stay afloat. Sainsbury’s strategy is to branch out into other areas, becoming a ‘one-stop shop’ for items other than groceries – as CEO Mike Coupe says, Sainsbury’s aspiration going forward is to serve customers “whenever and wherever they want to shop”. As a result, Sainsbury’s has already tried to boost its presence in non-food, which has higher profit margins, by growing its Tu clothing range and selling homewares.

Acquiring a company such as Home Retail, who own the Argos and Homebase brands, is the next logical step in that process.

2) Increasing customer base

Shoppers continue flock to cheaper stores such as Lidl and Aldi, and the price war between the Big Four supermarkets isn’t drawing them back – so Sainsbury’s plan is to capitalise on shoppers laziness, and offer them everything they need in one place. Sainsbury’s estimate that 2/3 of households shopped at their supermarket last year, with 2/3 also shopping at Argos. By selling both products in one place, less shoppers need to go to two different stores and, ergo, Sainsury’s customer base has expanded. Whilst investors may have been confused by the match up between the two Groups – Argos has been called a “working-class brand” while Sainsbury’s appeals to the middle classes – this strategy only serves to encourage both sets of shoppers into one store.

“We know that there is a benefit in bringing the two companies together and there are more opportunities combined than separate,” Mike Coupe commented.

3) Streamline costs

Sainsbury’s plan is, when the lease runs out on Argos stores, relocate them into large existing Sainsbury’s. 40 percent of Argos leases expire within the next four years, meaning the opportunity to streamline costs and cut rent is an immediate option.

As for Home Retail’s DIY chain Homebase, suspiciously little has been said about it in either the 22 page presentation or their 30 minute call to investors – given this, it seems likely that the Homebase arm will be sold if the deal goes through. Sainsbury’s originally sold Homebase in 2000 to Schroder Ventures for £969 million, and sources have said that there is no desire to own it again.

Under British takeover rules the supermarket now has until February 2nd to make a firm offer or walk away.

Miranda Wadham on 13/02/2016