Sainsbury’s experiment
is the one that got away.
A quartet of private equity giants tried to buy the supermarket group a . But they failed - largely because some of Sainsbury’s founding family thought the offer was too low.
But at almost exactly the same time, another retailer, , was bought by KKR, the great veteran of private equity. And, as I’ve mentioned before, although Boots is in healthcare and Sainsbury is largely in food, they have a good deal in common.
They're both worth about £10bn, give or take a billion or so.
They both face intense competition from and - though obviously in different parts of their respective businesses.
They've both been recovering after years of decline.
They're both run by executives trained by Mars - that's Justin King at Sainsbury and Richard Baker at Boots.
And they both have strong brand names and powerful market positions.
So there will be a chance to see over the next two or three years whether big businesses do better when owned like Sainsbury, in a conventional way - as a stock-market listed business - or whether its better to flee the stock market and be owned by private-equity.
As it happens, this morning Sainsbury has in effect stuck two fingers up at private equity – and at Robbie Tchenguiz, the property tycoon who owns 5 per cent of Sainsbury and wants it to demerge all its property into a separate, tax-efficient company, called a REIT.
Sainsbury has announced that the value of its properties is £8.6bn. But rather than do what a private equity owner would do, which would be to sell or mortgage most of that, it will hang on to those assets.
Why? Because it believes - like Tesco - that the value of those properties can only rise if its stores perform better.
So it's setting itself new three year targets for sales growth and for investment. And it's doing the complete opposite of Boots, in that it's not loading itself up with billions of pounds of new borrowings.
What that means is that it should have more resources to invest in the business.
So what will Boots have that Sainsbury doesn't?
Well, Boots won't have the bother and expense of keeping the City informed of its every sniffle and sneeze. And it'll provide infinitely more generous financial incentives to its top managers.
It'll be gripping to see whether Boots or Sainsbury eventually emerges as the stronger - not least because tens of thousands of employees depend on each of them.
Right now, Sainsbury seems to be moving out of its recovery phase and may actually be adding proper new sales for the first time in years. But what if it slips up?
Well Delta (Two), an investor which manages money from the gulf state of Qatar, recently became Sainsbury's biggest shareholder with a 17.6 per cent stake. And if Qatari interests wanted to own the whole thing, they have more than enough cash.
The modern rule for any company with decent assets and a good brand name, like Sainsbury, is that if private equity doesn't buy it, there's still a chance of a takeover bid from a Russian oligarch or an oil rich gulf state.
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Private Equity companies make little or no contribution to real economic growth and from the recently published world competitiveness league tables have had no impact on the UK's position. We're still languishing in 20th place and beginning to move backwards.
The problem is of course a lack of balance. Whilst PE deals seem to be the flavour of the month investment in start-ups and early stage companies continues to remain muted as compared with our competitors. Even the DG of the CBI recently said the UK is not creating sufficient new global companies to remain competitive.
Because of this I have come to believe PE deals are a major threat to the long term competitiveness of the UK economy. Unlike the USA where PE activity co-exists with real venture capitalism quite happily because they understand that company creation is just as important as company re-engineering the UK seems unable or perhaps unwilling to adopt the same approach.
Time is fast approaching where this should no longer be tolerated and the industry needs to be given the choice of either being regulated out of existence or getting their act together and behaving more like their US counterparts. The UK can't afford this one sided attitude anymore.
Excuse my ignorance, but why doesnt a potential target company just go and buy a private equity company??
Turn the tables.............should be fun!!
Sainsbury should keep its
real estate, reason banks do
not finance stock without proper
colateral.
I did work for a dept. store who
sold their real estate, and divided
the money amongst its share
holders.
After 100 years in business the
company was taken over, as banks
would not finance the company
anymore
Private equity is currently distorting the share price of at least three of the stocks in my portfolio. Yesterday, I had to sell my holding in Bausch & Lomb in the half-hour between them announcing an agreed buyout, and the optimists on Wall St. realising that there wouldn't be a higher bid from elsewhere. OK, so I made a small short-term profit, but I was hoping for more long-term from B & L.
Private equity is seriously distorting the markets, and pushing investment funds into the remaining stocks, which means the same amount of cash chasing fewer and fewer shares, pushing valuations to unjustifiable levels.
Whether in the long run it is good or bad for corporate governance, I can't help feeling that it's bad for the markets. And for the pension funds who depend on the markets.
The problem with trying to compare how Sainsbury's and Boots perform over the next few years is that KKR's plan is to transform Alliance Boots into a global healthcare business which is as much about distribution as retailing.
Peston is unreal-we shop at Sainsburys because they are provide top food and quality but if privae equity took over we would shop elsewhere-asset strippers are not to be supported-Peston would be top of the pops in Thatchers era , We do not like his ideas on the get rich and sod every else attitude-shame on the ³ÉÈËÂÛ̳ for offering this attitude
In response to Naresh, the vast majority of private equity funds are set up as partnerships. As such you cannot just go and buy them since you would require a willing seller. The reason that companies like Sainsbury can be bought is because a liquid market exists for their stock - they are publicly quoted. I won't bore you with the detail but once you acquire a certain % of a public company you can force the remaining uncooperative shareholders to sell - albeit if you're offering a good price there are often very few unwilling sellers (if they scupper the deal they'll see the bid speculation in their share price unwind within hours or even minutes of the deal drying up)
As for Mel's post, your ignorance about what it is that private equity firms do astounds me - albeit broadly in line with the rest of the guardian reading population.
If 'asset stripping' is all that it takes to make vast sums of money then surely everyone would be doing it! The way that a private equity transaction makes a return on invested capital can broadly be split into two parts 1) Paying down the debt used to fund the acquisition of the business, 2) Selling the business for more than the purchase price.
Harming the busines in any way will put both of these returns drivers at risk. The way to make money therfore is to work with the management of the business to help improve it - and this is where private equity funds can add real value. Yes there will be times when a private equity fund acquires an overstaffed business and needs to lay people off, this is simply putting right the mistakes made in the past. Naturally, these sort of moves are not ideal for the individuals involved, and often cause a raft of drivel in the papers around 'evil asset strippers' and 'a few people making vast sums of money at the expense of others' but fortunately business do not exist to employ people - they exit to make a return for their shareholders, the moment this stops, you don't have a viable business on your hands and then everyone loses their jobs.
There will also be times when a little financial engineering around property assets will make sense. Sainsbury for example is currently a property company with an interesting sideline in retail. Since Sainsbury's management have presumably been employed on their retailing credentials, it is only natural that there is value to be unlocked in their property portfolio, and there is absolutely no reason why unlocking this value would harm the core business in any way. Sticking to the knitting can be sensible advice for a lot of businesses.
In summary I would suggest to Mel that she should refrain from venturing strong opinions on matters over which she has very little grasp. Indeed, sticking to the knitting is probably very sensible advice for her too - most likely in the form of the wooly jumper worn on a Sunday afternoon while reading the Guardian and contemplating which fair trade coffee to buy from the organic food store.
With KKR and other PEG's i don't see Boots as a going concern, they have their unique selling points, however competition is feirce in its market, and when KKR are finished with them, they'll more than likely have many interest payments for years to come, not a going concern for me, they'll end up in Toy R Us' black hole.
As for Sainsbury's, how would keeping their heritage and rejecting a short term injection for quick cash actually help them in comparision to say Boots?
Can anyone help here?
Plus how would a PE deal benefit them if it was to happen?