Shares in U.K. supermarket group Sainsbury’s soared on the FTSE stock market on Monday, reaching their highest level in over seven years, after weekend reports of a potential buyout bid from a U.S. private equity firm.
Sainsbury’s is widely believed to the next possible target for foreign private equity investment, with Apollo in the front seat, after the current bidding war for rival Morrisons and the acquisition of previously Walmart
Last week U.S. private equity buyout firm Clayton, Dubilier & Rice (CD&R) had an improved $9.6 billion bid for Morrisons recommended by the board of the U.K.’s fourth-largest supermarket chain.
After the bidding battle for Morrisons, Sainsbury’s is seen as the most obvious target among the U.K.'s big four chains for a buyer. Yet as already seen with Morrisons, heavy interest could yet propel the asking price further in the coming days.
Morrisons Boosted By Rival Interest
The current $9.6 billion offer from CD&R is over $400 million more than the $9.2 billion offer originally tabled by rival suitor Fortress
The Fortress-led group - owned by Japanese investment giant SoftBank, in partnership with the Canada Pension Plan Investment Board and the Koch family - has urged Morrisons shareholders to take no action while it analyses the situation.
If leapfrogging between the two rivals continues, one option is for the U.K. Takeover Panel, which oversees mergers and acquisitions, to step in and arrange an auction ahead of the proposed October shareholder vote.
The CD&R bid is fronted by former Tesco chief executive Sir Terry Leahy, who is widely credited with turning market leader Tesco into a global retail powerhouse during his tenure and who pushed ahead with an aggressive international expansion. He is seen as a leading light in the grocery sector.
Both CD&R and Fortress have sought to allay concerns about private equity ownership by pledging to keep the head office in Bradford, Northern England and retain its existing management team and strategy, while honoring a recent hourly increase to $13.70 for shop staff.
CD&R also claimed that it had no plans to sell off the retailer’s freehold stores. Many supermarket chains lease their sites in what is effectively a commercial version of a mortgage, but Morrisons has previously refused calls to use ‘sale and leaseback’ to boost investor returns.
With around 10% of Morrisons’ stores loss-making, some closures seem inevitable, and the retailer's gas stations could also be sold - a strategy employed by the new owner after Asda’s recent sale.
Sainsbury’s Prepares For Possible Bids
U.S. buyout firm Apollo is taking an “exploratory” look at Sainsbury’s, according to reports in yesterday’s Sunday Times. It reported that Apollo has been scouting for targets in the industry after losing out in its attempt to snap up Asda last year.
Bid speculation has already seen shares in Sainsbury’s surge by about 45% since the start of the year, which went into overdrive in April when Czech billionaire Daniel Kretinsky raised his holding in the company to nearly 10%.
In recent years Sainsbury’s has bought general merchandise specialist Argos and integrated its retail offer within its supermarket stores, while it has aggressively rolled out its convenience formats, particularly in urban areas.
The U.K. grocery sector, which has endured some difficult years, has been boosted by the pandemic, as customers returned to stores and online delivery gained huge traction during the lockdowns.
Private equity firms can currently borrow money cheaply and use the significant incomes generated by supermarkets to pay dividends and service debt. Industry analysts are generally of the view that lukewarm investment sentiment has under-valued the sector's shares, making them ripe for private equity acquisition.
