Argos owner Home Retail has rejected a bid for the retailer by Sainsbury's made in November. The news of the bid in shares and cash of around £1bn (€1.37bn, $1.47bn) sent Home Retail's share price soaring by more than 20%.
Sainsbury's, one of the UK's biggest supermarkets, said it believed the possible tie-up would create "an attractive proposition for the customers and shareholders of both companies, establishing a platform for long-term value creation".
The supermarket's shares plunged on the news of the reportedly 'hostile' rejection of the offer. Sainsbury's has already been struggling to survive in a market dominated by budget retailers such as Aldi and Lidl.
The grocer said it is reconsidering its position after the rejected offer. In an effort to beat competitors, Sainsbury's has been hosting Argos stores in the chain's larger supermarkets since late April 2015.
According to Bloomberg data, Sainsbury's share price spiked shortly, which is likely the result of an investor buying a large amount of shares thinking the grocer had received an offer rather than being the bidding party.
Asda had been rumoured to moot a bid for Home Retail ever since the City started talking about a possible takeover. Sainsbury's came out as the surprise bidder. The rejection comes only eight days before the grocer is reporting its third quarter results and faces shareholders on 13 January.
The move is also seen as a strategic and confident step by CEO Mike Coupe, who joined Sainsbury's in July 2014.
The blind leading the blind?
Meanwhile, Home Retail Group's value jumped by over 20% shortly after the public announcement of the bid, taking its total share price increase of the day to more than a third. The firm's other subsidiary company, Home Base, was not mentioned in the report, sparking speculation of a sell-off of the DIY firm should another bid be accepted.
The offer clearly came at the right time for Home Retail, whose main firm Argos has been one of the most troubled stocks on the FTSE 250. The retailer issued a profit warning in late 2015, and has lost more than 35% of its share value since September.
The catalogue giant reported in October that sales fell 1.4%, while the umbrella company's revenue slipped 1.5%. Especially electrical and seasonal goods sales were disappointing, and the company is dealing with increasing pressure to reduce its delivery times.