Commercial Awareness Compass #87 | The commercial reasoning behind the £1.3 billion Argos markdown

10 years ago, Sainsreys acquired the British electronics and homeware retailer Argos for over 1.4 billion to try and compete with the likes of John Lewis and Waitetrose. But now, after receiving an offer of 120 million, Sainsreys had sold Argos to another company, raising questions about their employee status, ongoing collaborations, and all the legal issues that come with these moves. This is a commercial-renus compass, your weekly guide to thinking like a commercial lawyer. Each episode will explore a key issue shaping the legal and business landscape, helping build the clarity and confidence to discuss it by breaking it down to three levels. Beginner, Intermediate and Advanced. I'm Sam, an SQL student and a future translator, I'm joined and say by Henry. How are you today, Henry? Yeah, good, thank you. Welcome, thanks so much. Brilliant. Thank you. So just to get us started with this story then, I think we all recognise Argos from our maybe our young beers as children circling the catalogue items we want at Christmas. But what are they doing now and what's their relationship with Sainsreys? Why do Sainsreys own them almost? Yes, it's socially kind of mentioned, Sam, almost 10 years ago, 2016, Sainsreys originally purchased the Argos retailers to have concessions within their stores for, I think you said it was 1.4 billion, which is obviously a lot of money and now it's being sold for quite a lot less. We'd all gone into our Sainsbury stores, we picked up our items, we've picked up. Our grocery is all in one thing, but now Sainsbury has said, do you know what, enough is enough, we are going to sell the Argos part of the like Sainsbury's infrastructure to Swift partners and what we will do is no longer have ownership of that and what that allows us to do is to kind of focus on what we've always been good at and what we want to get more kind of focused on is the grocery business, the actual supermarket side of the things, but they're also going to kind of still focus on their like Sainsbury's home stuff as well because they've got like a home range that's sold in the Sainsbury stores and I believe some of it's also sold through Argos, but Sainsbury's will still house the Argos stores within them. There was still like qualify for nectar points or if you collect nectar points and all of that good stuff. So I guess on the face of it for consumers, there isn't much of a change as it stands, I don't know what the long term plan is, but I guess for the actual Argos employees, this is when they might see this news and think, oh gosh, am I going to lose my job? Are there going to be redundancies as a result of this new sort of takeover? What's that going to look like? Yeah, I think just before we get into that sort of what it's going to look like for the Argos side of things. I want to ask a bit about who they're selling to. So they've had this big acquisition. They spent 1.4 billion. It's lost almost what I guess 90% of this value and it seems like nothing's really going to change. They're still in the store. They're still using nectar points. So who are they selling it to and almost why would they want to buy it if you're that group? Yeah, so I believe they're being sold to Swift partners who might be selling are a relatively new incorporation and the team around that, I think they've been involved. I think one of them's XCO up and they've been involved in sort of turnarounds. Before, so I think the intention is if we kind of split the two, they can focus on actually turning the Argos business around. Because obviously you have to consider that it's competing with the likes of Amazon. It's competing with a lot of these same day delivery, online focused electronics and sort of consumer retailers. I think as you mentioned sound long gone other days where you walk into an Argos store, flick through a catalogue to page like 400 circle things, thin and a little slip. It feels very Victorian and then take the slip over to the desk and ask for your goods. Now you're just swiping on your phone and you're getting your delivery via Prime in a couple of hours. So I think there's going to be a real shift around how it operates to actually kind of bring back some of that value. Yeah, it almost feels like Argos was very outdated, not just in the way that they used to sort of operate with the catalogs. But even now, if you go into the stores, they have the iPads. It feels a bit more modern but still compared to an Amazon who have no stores. They don't have any permanent employees who might not be at full value every second of the day. They have drivers who they optimize their schedules. They've got warehouse people who are optimizing their schedules. And it almost seems like Argos needs a sort of new head and refresh to actually compete and maybe find that valuation they once had in the sector. Yeah, do you know what actually it wouldn't surprise me if in a few years time that an Argos store is essentially just like a locker room where you know, you've got those imposter things that you go in and your items are just dropped in and you just pick them up. And then obviously the number of staff you need reduces that reduces overheads but you've got the risk of people losing their jobs and all that stuff. But I think they will be looking at ways to kind of innovate and just kind of make the consumer experience more kind of streamlined and more focused with how competitors are working, particularly in light of sort of AI and all of these new like infrastructures and things we can have in the retail sector. Yeah, so now we've got the why and the who. So as we move into the intermediate, I wanted to think about how this deal is going to work. So you touched on briefly the issues with the employees. So I think one thing people talk about a lot is 2P. 2P. Well, how does that deal? How does that work in this deal and what are the issues that lawyers going to be thinking about with the employee who's going forwards? Yeah, one of the biggest things from an employment perspective is the 2P regulations as some of you may or may not be aware of your through your studies if you've done an employment module or not. But 2P regulations basically govern what happens when there is a transfer of an organization from one entity to another and we have that here and it's called a relevant transfer. There are different criteria as to what constitutes a relevant transfer. This is likely to be a relevant transfer. So in the sort of the contracts that the parties have, it will kind of set out what happens when there is a relevant transfer. So because it's being, our boss is being sold to swift partners. In theory, those our boss employees would assume that they're new employer when I'll be swift partners or whatever rather than saying these briefs. I don't know what their employment contract, so that's just she's that as an example. Do they transfer? Do they not? Well, they shouldn't theory. They're not going to lose their jobs. So that's what this will dictate. So the employment teams for the very relevant parties will be looking through to see, okay, we've met all the criteria or we haven't met the criteria. X, Y and Z. What's the repercussions if we don't do this? There's probably an indemnity in there as well. You usually see that in commercial contracts around if there's any kind of claims that arise from the transfer from one employer to the other. But usually they have like a hard stop date and say, from this date, you and I are responsible for any issues that arise with the employees. Any claims that arise before that will deal with that. Yeah, and just to explain quick, I'm sorry, just to explain quickly, could you say how an indemnity would work? Because I think not everyone will have heard of the idea of indemnity clause in this sort of situation. Yeah, absolutely. So, and the indemnities are funny things and they, there's a lot of discourse around them and whatever it may be, but if you haven't heard them. So, say for example, I am transferring my employees to SAM. SAM is now responsible for my employees. But if there was, if whilst the employees were in my care, my capacity, there was a claim, but SAM has my employees and they bring that claim against SAM. Well, actually, the issue arose when those employees were with me. So, contractually, I would indemnify SAM. So, SAM would say, hold on a minute, don't bring that claim against me. I'm not responsible. I've got an indemnity with this guy. So whilst SAM may be the one having the claim brought against him, SAM would then come after me under the terms of the indemnity and depending on the scope and all of that stuff would say, actually, you need to cover this cost because you've indemnified me for this exact sort of scenario. So, that's how SAM would be sued, but then he would claim back against me under the indemnity. So, I'm still on the hook. I don't just lose that. Perfect. Thank you. That's a very succinct explanation. I think even better than I've heard in my contract modules before. So, just look at this. You're welcome. I'm a lecturer now on the SQE. Another career option for you. If we look at a deal like this, we've spoken a few times about other deals, I think, on the podcast. I sort of think of the Paramount Netflix and Warner Bros. Kaffafel from earlier this year. But if we're looking at deals like this from the sell side, what are the key things that lawyers will be dealing with? So, what would the in-house, what would the external council deal with in a mass like this? Yeah, so I think if we're August and we are selling part of our business to Swift partners, what we're going to be wanting to do is basically getting our business sell ready. ready. So we've got all of the agreements ready, we've got all of basically all of our ducks in a row. What's how are we going to be paid for this? Ultimately, we're selling a business, we want to be paid for it. That's our biggest thing is we want that money. So we need to make sure we know how that's going to happen. Are there any sort of conditions that need to be satisfied in order for those funds to be released? Did they even have the funds? We want to check all of that. And we basically want to cooperate with the buyer because the buyers are going to want to know exactly what they're buying. So we'll need to be giving all of the relevant disclosure, making sure that we've got everything. I don't know, I haven't seen anything around if any external council have been involved, but I could take a guess that they likely have got external council to assist on sort of a project. This big, I don't know, the size of St. Petersburg House legal team, but I'm going to assume they're probably going to want some support on one deal that's so public into a deal that's pretty big and involves lots of different moving parts. Yeah, and so looking at those sort of aspects, things like completion mechanics that they've discussed quite a lot. What would they actually look like in practice to say the in-house or even the external council might be involved? What are they actually going to look at and what are they actually going to be doing? Yes, so completions essentially just the signing of all of the documents and like back in the good old days, you'd all be in like a conference room together with all of the contracts out of the event. Each party would be counter signing like their parties and the juniors would be compiling them. But I think ultimately once all of the conditions precedent have been met and that's almost like a checklist to say all of these conditions need to be satisfied for this deal to be signed and done and for the monies to be transferred and ownership to them take place. You may then have some conditions subsequent which the parties have agreed that it will take place after the deal has completed and that could be like, I don't know, registering of certain things or whatever, it can just be small like ancillary things like sending document bibles or whatever and then that they will happen within a specific timeframe after the sort of the completion has taken place as well. Fantastic, thank you and another thing just to sort of round out the intermediate one to discuss is as we saw with Paramount and Warner Bros. deal earlier this year some time as regulators can get involved and something can seem like a done deal and paper and then ultimately rate later steps and it says no this isn't going to happen we won't allow the competition. In this is this something that seems breeze or swift partners would likely be concerned about have you heard anything about any regulators maybe investigating or taking a sort of negative view of this? For those that don't know we have the competitions in markets agency or authority and always forget what the A stands for which ultimately has like regulations in guidance around making sure that the markets are basically like operating in a fair way. I haven't seen anything around this deal being flagged by the CMA and I do think it's relatively low risk in a sense that I don't think it's going to massively disrupt or shake up the market or cause concern for competitors. I mean heck they were bought for 1.4 billion in 2016 and now they're being sort of for 120 million. So I do think it's probably not a cause for concern but of course the competition and regulatory lawyers involved in this transaction will be on hand to basically try and mitigate any risk around that. I guess if anything is very pro competition seeing as a big retailer is getting rid of something else they now don't compete in the same area so CMA are quite happy about this. Yeah exactly. Now I just want to move into the advance and think a bit more about that strategic outlook. So we've just sort of discussed about what the lawyers do, what's happened here. Now in the long run what is this sort of long game for Sainspreet in this? If you're thinking from a commercial standpoint and if you're let us say you're discussing this at an interview, why would Sainspreet want to get rid of this arm that gives them maybe another sort of access into an industry? What's the benefit for them a long time? I think personally that Sainspreet has always been at its core a food supermarket and the supermarket industry has changed so much and we've got the likes of WayTrows and M&S for example is booming at the moment. Everybody wants to be M&S, people want to be buying from M&S's aspirations, what retailers are trying to be like. And I think with Sainspreet having Argos in various other bits and pieces within their retail stores, the supermarket's almost kind of taken a back seat like the net to card isn't what it once was in all of the discourse around that. So I think by freeing up their responsibility in ownership of Argos they can perhaps push their sort of resources back into making like Sainspreet as kind of like a market supermarket in a sense that kind of always previously was considered like oh you shop at Sainspreet that's cool, that's fancy and now it's kind of lost that in in a sense it's just another Tesco, it's just another asda. Why would I go to Sainspreet's if I could go to Aldi or the door if I wanted value for money or I could go to M&S and WayTrows for like luxury and I think it's kind of from a commercial perspective it's kind of lost its way and is now got the resource hopefully to kind of focus on its core asset. Yeah so it's almost like by becoming leaner and getting rid of an arm they're able to sort of almost regrow in a new way so like no long time to deal with Argos which I think looking at their website just before the episode a lot of the things they have are kind of budget almost they're on sale a lot and they have a lot of clearance and deals and it seems almost maybe that is devaluing the brand image if you have this arm that maybe seems a bit more so it seems less desirable just because of the way they're having to operate to try and compete with the likes of the Amazons and the team moves of the world. Yeah exactly and I think again for a comparison if you wanted one for an interview WayTrows and John Lewis like that's like Pete British like food and like retailer and I think Saints Breeze and Argos probably had that vision and it just didn't quite work out but I think we focus on the Saints Breeze now being able to focus on its like core business of the grocery side of things but Argos now having a designated owner and it's not kind of controlled by Saints Breeze that could do real well then for Argos and that capacities for the reasons we spoke about earlier they're now having dedicated and specialist ownership that can kind of enhance and overhaul the kind of Argos experience which could then benefit that business as well. Yes it's almost too prone because Argos clearly they hadn't dominant market position if they're being sold for 1.4 billion there's clearly been lost and although we don't know too much about switch partners as a corporation it does seem that they almost are able to specifically go in and give Argos the time and care that maybe Saints Breeze couldn't and do you think that could maybe open up any new relationship opportunities or like general business opportunities for Argos. Yeah I think it would be interesting to kind of see how it goes and I do think that the new owners were, they're obviously going in for a reason and they've got objectives. I will be interested to see and there might be more about the time the viewers go for interviews and assessment days and stuff is to whether or not there will be any closures of stores once this deal comes into effect and how long will they stay in sort of Argos stores in Saints Breeze stores. Sorry but I do think this is just a reflection of kind of consumer trends what sort of supermarkets in the high street is looking like and a lot of firms actually will have like retail like sectors where they've got lawyers that kind of are all over this sort of stuff. So this would be a great story of one of the firms that you're applying for has this to kind of showcase your understanding of that sector more broadly. Yeah because I think as well as you mentioned with the stores inside Saints Breeze there are other commercial questions you have to think about. So if Argos does decide to say close their stores in Saints Breeze suddenly you have that loss of value of loads of dead space in the Saints Breeze whilst they're being renovated and changed back into maybe food or clothing sanctions and suddenly that itself is a commercial question. You'll effectively have a bit of land within the lot that isn't making any money for the Saints Breeze and that becomes a commercial question that you have to think about as a lawyer. Yeah exactly that there are so many things that like sounds so silly that oh it's just a supermarket with a little retailer inside of it, but actually when you break it down on all of the different parts of it, the IPO and a ship, the employees, the funding, the business side of it, the regulatory side. There are so many like arms to this one story that seemingly seems so simple and basic, but actually we'll have lawyers working around the clock to deal with all of these different parts. Yeah and just earlier you mentioned this sort of simple look of industry trends, could you outline what those industry trends are and what we're sort of seeing broadly in the retail sector at the moment? Yeah I think like most places in most industries is kind of going through this digital transformation and that like the supermarket basically wants you to do your shopping, like through your scanning go, so you're basically doing all yourself, you'll see the amount of self-serve checkouts increasing now for all the different sizes of shops that you'll do, there's usually one manned checkouts, so there is this huge digital transformation and I think retailers effectively want the whole process to be as seamless as possible from, I don't know you could start doing your food shop at home and then just finish off in the store, so you've just got this one smooth journey and I think Amazon probably tried pioneering that, I don't know if they still exist with their like stores, their fruit and vegetables that they had. The Amazon fresh even, I don't think that went quite to plan, but I think that's kind of what we're seeing this space look like. Yeah and just to find a point actually on that trendy you picked up, because I just remembered the Amazon fresh they had the whole sort of gimmick was that you could go and pick up anything off the shelves and it would be charged your Amazon account when you leave and I think we're almost seeing a research at that with the, as you said, the scan and go and I sort of tried to collect data and use that to optimize how you're interacting with your shoppers because we spoke about how the next cards will still be staying with Argos, next to give you personalized deals now based on what you've shot before to try and keep you coming back and we see things like, for example, there's a test goes in central in central London near a bank where they have that Amazon fresh set up we just picked things off the shelf and then you tap your card at the end you don't scan anything and so it doesn't seem to be that there's almost a data focus that Argos could take advantage of. Yeah exactly and I think obviously data is so valuable and also the amount of cameras in those Amazon fresh stores like through the roof so there are a whole host of data privacy concerns but yeah having the apps, having the data collection that allows you to target your customers in different ways and give you specific prices and it's just a broader way of like gauging and understanding around an individual which is obviously great from a marketing perspective. You could argue great from consumer perspective as well because they're getting tailored deals but I guess that comes at the cost of sort of your personal data. Yeah it always seems to be trade off with these things that your data and your privacy is getting eroded slowly over time but I think that brings us just about to time for today's episode. I think we've called quite a broad source scope there with everything involved so as always I want to say a big thank you to you Henry for talking us through the story and making it as digestible as possible and a big thank you to everyone for listening. So remember being commercial isn't just about following the headlines it's about understanding the questions they raise and how lawyers help to answer them. We'll see you next week to keep building your commercial awareness but until then prepare without the panic. So everyone I'm tired of saying - Thanks, Bruce. (laughs)