GUS stuns City by launching hostile pounds 1.6bn bid for Argos

Great Universal Stores surprised the stock market yesterday with a pounds 1.6bn hostile bid for Argos, the catalogue retailer. Argos rejected the bid as 'opportunistic' and must fight the takeover without its chief executive who is seriously ill. Nigel Cope, City Correspondent reports.

GUS turned hostile after failing to agree terms with the Argos management during two meetings in the past week. GUS pitched its cash offer at 570p but the Argos share price soared 42 per cent to 630p, indicating that the City regards it as only an opening shot. GUS shares closed 29p higher at 762p.

"At the right price it is an attractive deal but it would not look so good much over 630p," said Nick Bubb at SG Securities. Argos rejected the offer and advised its shareholders to reject the offer. Argos also announced that its chief executive, Mike Smith, is unable to undertake his full range of duties and is undergoing a course of medical treatment. The company has decided to search for a new chief executive designate. "To describe it [the bid] as opportunistic in view of all the circumstances would be an understatement," it said.

Analysts were sceptical that a counter-bidder would emerge. Some suggested Kingfisher but it would run into regulatory difficulties as its Woolworths chain has a high market share in toys in which Argos is also strong.

It is GUS's first ever hostile bid in its 80-year history and will be funded by around pounds 1bn debt, the first time the company has owed a penny since the 1950s. Lord Wolfson, GUS chairman, first approached Argos nine months ago about a possible link in home shopping. It held bid talks with Sir Richard Lloyd, the Argos chairman, twice in the last week but they broke down on price. "Our impression was that they agreed there was a certain logic to the deal but there was a big gap on price," Lord Wolfson said.

GUS said its offer represented a 40 per cent premium to the closing Argos price on 27 January and so was "full and fair".

Lord Wolfson said the logic of the deal was not to cut costs or clear out the Argos management, most of whom would be retained. He said the deal would give GUS a high street presence with 433 stores, which could be used to build a valuable database on customer shopping habits.

A deal would enable GUS to offer Argos products though its own catalogues, which include Kay's and Choice, and to include GUS ranges in the Argos product selection. GUS also said it would be able to help Argos build a home shopping and home delivery operation at a fraction of the cost of the programme planned by Argos. It said it would be able to offer call centres, and a delivery infrastructure using its White Arrow van network, which handles 110 million parcels a year. GUS would also be able to offer credit to customers using its Experian finance operation.

Lord Wolfson said Argos had been facing considerable pressure as rivals grabbed market share in its core markets of toys, electricals and jewellery. A good home shopping operation would also help alleviate Argos' problems with long queues at Christmas, he said.

He said he did not expect the deal to run into problems with the regulatory authorities as there were no market share problems.

The offer is a huge blow to Argos, which was one of the stock market's star performers in 1995 and early 1996 but has since fallen from grace. "It is inescapable that Argos has run out of steam," said Richard Hyman of Verdict Research. "But it is a good business and is not dead and buried." He said among of its problems were a mature market, price competition from rivals, and few exclusive products that could not be bought elsewhere. He said some consumers might have deserted the stores for shops with slightly better service and a superior store environment.

It has been seeking new routes to customers and planned to roll out a national home shopping operation next year.

The deal would mark a return to the high street for GUS, which in the 1960s had more than 2,000 stores. It represents a further step in the revitalisation of GUS under Lord Wolfson, who became chairman in autumn 1996. During his tenure the once sleepy group has already paid pounds 1bn for Experian, an American credit scoring and database company.

It is thought GUS might demerge the Burberry operation, which has 60 UK stores, at some stage. Lord Wolfson admitted yesterday a demerger might be possible in three to five years.

Outlook, page 21

argos

- The company is 25 years old and the first 17 stores opened in 1973

- Bought by BAT Industries in 1979 and floated on the stock market in 1990

- It has 430 stores in the UK and Ireland

- It employs an average of 18,000 people

- In 1996 it made a pre-tax profit of pounds 141m on sales of pounds 1.7bn

- It is the leading catalogue chain store and is third in the world

- Seven out of ten households have a copy of an Argos catalogue

- It had a stock market value of pounds 1.27bn as at close of trading on Monday

GUS

- Known as GUS, founded in 1917

- It had a stock market value of pounds 7.37bn as at close of trading on Monday

- It achieved 48 consecutive years of profits growth until 1997, when profits fell to pounds 570m on pounds 2.7bn turnover

- Until recently the company was known for a conservative policy of organic growth

- It employs about 33,000 people

- Its main divisions are home shopping, Burberrys, overseas retailing, information services, consumer and corporate finance and property