Part A

Executive summary

Home Retail Group plc is a fast developing firm in the

home improvement industry in European market. Kingfisher,

as a world leading company in the same industry is

considering acquiring HRG to further extend their current

market power. In order to figure out whether the

acquisition is worthwhile, the following report analyzed

the financial performance and the strategies of both

firms. The financial ratios demonstrated that although

the profitability of HRG measured by ROCE and profit

margin is lower than that of Kingfisher, from the view of

position and potential, Kingfisher could increase the

liquidity efficiency and grow faster if it acquired HRG.

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In addition, there are also some other benefits of

acquisition, such as achieve economic of scale, reduce

risks and increase market power.

1 Introduction:

The Europe’s largest home improvement retail company

Kingfisher plc is now facing with a decision whether to

acquire Home Retail Group plc (HRG), which is the second

largest company in this industry. In order to give some

suggestion to Kingfisher, this essay will be mainly based

on key financial ratios as indicators to compare and

contrast the two companies’ recent performance so as to

find out whether it is a good decision to acquire HRG. In

the meantime, the non-financial factors such as the

current strategies of both companies will also be taken

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into consideration regarding the acquisition. This essay

will use the CORE model to analyze the performance of HRG

and Kingfisher to give Kingfisher some suggestions

whether to acquire HRG or not. CORE is a framework of

strategic financial analysis consisting of context,

overview, ratios and evaluation.

2 Contexts & Overview

2.1 External environment of the home improvement industry

Porter’s five force of home improvement retail industry

in UK indicated the external business environment.

2.1.1 Buying power is moderate.

There are large numbers of individual buyers within home

improvement market, which reduced the buying power.

However, the economic recession in UK increased

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customers’ price sensitivity, the overall spent on home

improvement products decreased.

2.1.2 Supplier power is low.

The supplier power is diminished in two ways in home

improvement market. Firstly, the equipment and materials

providers vary in size and types due to the

diversification characteristic of this industry.

Secondly, the existence of low switching costs enabled

firms change from one supplier to another without being

punished.

2.1.3 Threat of new entrants is moderate.

The entry barriers is relatively low for this retail

industry, the capital requirement is low that it is not

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difficult to start up a small-scale firm, which can be

specialized on a narrow market segment. However, the

economic of scale achieved by large firms increased the

competitive advantage in price, this give the new

entrants high barriers to entre.

2.1.4 Threat of substitutes is low.

Although there are some professional services as

substitution such as builders, painters and plumbers, it

will cost consumers more time and more money than doing

their own home improvement work.

2.1.5 Degree of rivalry is strong.

The major market competitors in this industry are similar

in nature and the product they sell. Thus the competition

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is relatively strong. There are three major leading

retails in UK home improvement industry. Kingfisher Plc

is the largest one with about 860 stores operating in

eight countries. The second largest is Home Retail Group,

primarily operates in UK and Ireland, and followed by

Tracis Perkins Plc, which operates 16 businesses from

more than 1800 sites across the UK (EBSCO, 2014). In

addition, there are also some small independent retails

specializing in some market segments.

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Buying power

Supplier power

Threat of new entrantsThreat of substitutes

rivalry

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Porter’s five force of home improvement retail industry in

UK

(Level of degree 0 is week, 5 is strong)

2.2 Internal strategies of HRG

2.2.1 Strong market positioning

HRG has three business areas namely Argos, Homebase and

Financial Service. Argos is a general merchandise

retailer positioned itself as a multi-channel, value-

orientated format and distinguished itself from the

supermarket (EBSCO, 2014). Homebase is one of UK’s

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largest home improvement retailers who are targeting at

the similar market as Kingfisher offering style-led home

improvement products. Furthermore, the firm has a clear

scale advantage thus increased its price competitiveness

compared with its rivalry. From the view of strong market

position of HRG, once acquired, it can not only help

Kingfisher achieve a wider economic of scales in the

Homebase sector, but also achieve diversification in

Argos and Financial Service.

2.2.2 Accelerate online channel sales

In 2013, Argos announced a transformation of its position

from the catalogue-led business to a digital-led business

(EBSCO, 2014). The Internet sales reached 42% of Argos’

total sales in 2013. Furthermore, Homebase also started

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to launch Internet service and now presented 5% of its

total sales (HRG, 2014). The online channel sales are

fast growing with the rapid rise in websites and mobile

apps usage. Thus accelerating online channel sales can

ensure a high growth prospect. Kingfisher’s current sales

channel is largely restricted to the store-related

channels, thus a transformation of sales channel is

necessary. The acquisition of HRG can transfer HRG’s

online selling technology and experience to Kingfisher

and thus may provide Kingfisher with opportunities of

further expending its market.

3 Ratios

To assess the financial conditions and performance of

HGR, different financial ratios can be used. These

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financial ratios are grouped into three different

categories, profitability, position and potential. The

following section will analyze the main differences

between HGR and Kingfishers in those financial ratios,

respectively.

3.1 Profitability

Profitability is used to determine how well the business

has done. The key indicators are ROCE, profit margin,

gross margin and net assets turnover. ROCE assesses the

ability of a company’s utilization of capital to generate

profits (textbook). Both ROCE and profit margin indicates

HRG is significantly lower than Kingfisher. However, the

gross margin of HRG (31.63%) is a little lower than

Kingfisher (37.41%), while both of them are great higher

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than average rate (22.29%) in home improvement sector

(Reuters, 2014). From the profitability gaps between HRG

and Kingfisher, one cannot judge that HRG is performing

worse than Kingfisher. Those gaps can be accepted when

knowing the market dimension of both firms. Kingfisher is

a global market leader in the home retail industry

whereas HGR’s main market is merely in UK and EU; it is

inevitable that the profit earning ability of HRG is not

as good as Kingfisher. Therefore, from the view of

profitability only, it is hard to estimate whether the

acquisition is a good strategy.

3.2 Position

Position is used to measure the liquidity of capital. The

key indicators are current ratio, gearing, interest

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cover, debtor days, inventory days and liquid ratio

(textbook). By comparing the current ratio and liquid

ratio of the two companies, HRG has a higher liquidity

than Kingfisher, which means HRG can pay liabilities more

easily than Kingfisher. This is a favorable condition for

Kingfisher to acquire HRG. In addition, in terms of

gearing, HRG has a relatively lower debt rate. Therefore,

the acquisition of HRG can probably bring leverage

benefit to Kingfisher. This will allow the combined

company to have a higher debt-to-capital ratio by making

full use of HRG’s unused debt capacity (phd84). However,

in terms of inventory days, HRG has a ratio of 91.86 days

in 2013, whereas Kingfisher has only 71.91 days of the

same year. Thus, the acquisition can be considered to

improve the efficiency of inventory. From the perspective

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of firms’ position, the acquisition is favorable for

Kingfisher.

3.3 potential

Potential are used to predict the future performance of a

company, which is measured by earning per share, price

earnings ratio, dividend yield and dividend covers

(McLaney, 2013). PE ratio indicates the market confidence

of a company. A firm with a higher PE ratio shows a

potential growth opportunity. HRG has a very high PE

ratio (27.08) that doubled the rate of Kingfisher (13.72)

so HRG in inferred to have good growth prospects.

Furthermore, the dividend yield and dividend cover of

Kingfisher are much higher than that of HRG. This

indicates Kingfisher returned more cash to shareholders

whereas HRG retained the money to do reinvestment in

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business. Myers and Majluf (1984) argue that there are

two types of firm likely to be acquiring targets: one is

a high-growth firm, and another is a resource rich firm.

HRG is categorized into the first type. Furthermore, the

growth-share matrix shows that HRG is similar to Question

mark with a high growth potential and low productivity,

whereas Kingfisher is like a cash cow with higher

profitability but a relative low growth (Grant, 2010).

The acquisition of those two can bring them to the

category of Stars with both high productivity and growth

potential. Thus, it is easy to assume the availability of

high growth of HRG could bring a prospect future of

Kingfisher after acquisition.

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4.0 Evaluation:

Basically, the acquisition can bring a better future to

Kingfisher, through which, it can achieve economic of

scales, reduce risk through diversifying business

portfolio and increase market power. Nevertheless, some

potential risks of acquisition such as cultural

resistance, complex organizational structures and lack of

transparency also need to take into consideration.

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4.1 Economic of scales

Theoretically, mergers and acquisition can reduce

repetition through creating a single shared distribution

network, information system and marketing forces.

Besides, from the intangible resource, brand reputation

and technology can also be shared so as to reduce the

marginal cost for firms involved in the merger process

(Grant, 2010). The acquisition will enable Kingfisher and

HRG share the same infrastructure as mentioned above,

which can enhance the cost advantage and increase price

competitiveness among the home improvement industry.

4.2 Diversification reduce risk

Diversification can reduce idiosyncratic risk by

investing in different portfolio. In particular, through

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diversification, earning volatility can be reduced,

profit can be stabilized and potential value can be

increased. Apart from Homebase, Argos and Financial

Service are the other two major businesses in HRG, which

are operating differently from Kingfisher. Argos

positioned itself as a multi-channel, value-orientated

format retailer and Financial Service as a complementary

service offers credit and insurance products to customers

(HRG, 2014). Hence, when acquiring HRG, the specific risk

of Kingfisher can be diversified away from Argos and

Financial Service sectors.

4.3 Market power

Increasing market power means increasing the size of the

firm relative to other firms in the same industry. Market

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size is the crucial factor in any long-term battle with

rivals and allows a firm to outlast its rivals (Myers and

Majluf, 1984)). Since they have already becoming the

leading firms in the industry, the combination of

Kingfisher and HRG can definitely extend their market

power.

5.0 Conclusion

In conclusion, this essay use CORE model to analysis the

current financial performance and position of HRG. At the

beginning, it analyzed the context and overview of the

external industrial environment where the Porter’s five

force is applied. Furthermore, through assessing the

HRG’s internal strategies, it is found that the

competitive advantage of HRG lies in its strong marketing

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positioning and multi-channel sales. This provides a

positive condition for Kingfisher to acquire HRG. When

analyzing the financial ratios, one can infer that the

good position and potential of HRG will enable Kingfisher

to grow faster and become more efficient after

acquisition. Finally, the non-financial factors are

analyzed in the evaluation part to support the

acquisition is a preferred strategy for Kingfisher’

future performance. Although there are number of evidence

indicating the acquisition is a worthy choice, whether to

acquire HRG or not, however, still depend on the

manager’s decision.

Reference

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Home Retail Group PLC (2013) Annual Report and Financial

Statements 2013.

Kingfisher (2013) Kingfisher Annual Report and Accounts 2012/13

EBSCO (2014) Kingfisher, PLC SWOT Analysis, pp. 1-7, Business

Source Premier, viewed 14 April 2014.

EBSCO (2014) Home Retail Group Plc SWOT Analysis, pp. 1-7,

Business Source Premier, viewed 12 April 2014.

Industry Profile, (2013) Home Improvement Retail Industry

United kingdom, Marketline.

McLaney, E. J. (2013) Accounting and finance for non-

specialists Harlow, England: Pearson, 8th edition.

Reuters Financials Kingfisher PLC

http://www.reuters.com/finance/stocks/financialHighlights

?symbol=KGF.L Accessed on 12 April 2014

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Myers, S and Majluf, N (1984) “Corporate Financing and

Investment Decisions When Firms Have Information that

Investors do not Have”, Journal of Financial Economics, 13 (1),

pp. 187-221.

Grant, R. M. (2010) Contempoary Strategy Analysis. Barelona,

Spain: Thomson Digital.

Home Retail Group (2014): https://www.homeretailgroup.com

Accessed on 12 April 2014

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