Blog: Is Sainsbury's really up for grabs?

Catherine Sleep | 14 February 2007

One of the biggest names in UK retail dominated the headlines last week. Speculation emerged that the reduction of the Sainsbury family’s stake in the eponymous supermarket chain was a precursor to a takeover. Within hours private equity groups CVC, KKR and Blackstone had indeed announced they were “at the preliminary stages of assessing Sainsbury". Later on rival equity firms Cinven and Texas Pacific were linked to a fresh offer while rumours began that a trade buyer could emerge in the shape of Marks & Spencer.

Indications were strong that the potential bidders would seek to increase Sainsbury’s non-food offering, prompting the chain to tell just-food it would be “unwilling to sacrifice its emphasis on quality food” in order to increase its non-food offering.

But is a sale really on the cards? If I had to stick my neck out, and we all know that’s a dangerous game, I’d say it was unlikely. Yes, retail property is extremely attractive to private equity buyers, but recent months have seen a number of failed private equity moves.

Moreover, the rumours of a bid for Sainsbury’s broke at a very early stage, sending the share price soaring. An early bidder who had managed to seal a deal quickly may have bagged it for 500 pence per share, but a successful bid under the 550p mark looks unlikely now. Is there enough profit to be wrung from the business to justify this outlay? Analysts at American investment bank Merrill Lynch believe that the recent price movement makes “delivering an eye-popping premium even more difficult. Indeed, we struggle to derive a bid price above 500p if the equity holders are to achieve an internal rate of return in excess of 20%.”

Industry analysts at Datamonitor are in agreement: “Any successful bidder would take on substantial risk and would find it challenging to make a solid return - especially given the fact that Sainsbury’s is well on the track to recovery and has already made substantial cost savings”. Nevertheless, we’ve all been wrong before. Watch this space.


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