The board of Argos owner Home Retail Group has approved a GBP1.4bn (US$1.99bn) takeover bid from UK retail group Sainsbury's, marking the next step in the road to completion of the merger.

Home Retail Group's board today (1 April) unanimously approved the deal, which will be implemented by a 'Scheme of Arrangement' rather than takeover, meaning 75% of the shareholders need to agree to the transaction rather than 90% for a takeover. In addition, the 'Scheme of Arrangement' is believed to make it easier for Sainsbury's to buy 100% of the shares and harder for minorities to resist the transaction. 

The next steps in the transaction will see a Prospectus/Scheme document published, with the takeover panel having consented to this being published more than 28 days after today's announcement. This will be followed by a shareholder meeting to approve the transaction, and then approval by three relevant regulatory parties (FCA, CLA and Guernsey Financial Services Commission), and for the deal to complete by March 2017. 

Home Retail Group operates the Habitat home and Argos general merchandise stores. Argos, in turn, is the exclusive retailer of the American clothing brand Cherokee.

Analysts at Bernstein believe the deal is well constructed, enables earnings per share accretion, debt reduction and avoids a class 1 transaction. "Sainsbury's is paying a 'fair price' for Home Retail Group, getting a non-food supply chain very cheaply, a third of the cost Tesco paid for Tesco Direct.

"From a business point of view, the concerns about "Argos being a troubled business set for sustained decline" remain fully valid and that will remain a risk factor hanging over the Sainsbury's shares in the coming years.

However, they added: "Sainsbury's argues that those losses would be more than offset by the sustained growth of the existing fast growing Sainsbury's non-food business, and the fact that Sainsbury's is a better owner of Argos as it can rapidly reduce the foot print of Argos through its own store locations."

Last month, Sainsbury's said its clothing sales increased more than 10% in the fourth quarter, as the retailer reported its first rise in overall like-for-like sales in over two years. Helping to drive growth was the launch of its 22nd collection by designer and TV stylist Gok Wan, which had its best ever February launch. 

Sainsbury's Q4 clothing sales rise 10%