Sainsbury – the numbers
Sainsbury has now received a written, conditional takeover offer from Delta Two – which has been described to me as considerably less detailed and comprehensive than the spring proposal from the private equity quartet led by CVC.
And what’s striking about this conditional bid is how similar it is to that earlier private-equity offer.
First things first. The cash offer price is 600p, not the widely touted 610p – which puts a value on the whole business of £10.3bn.
Second, the hard equity from the Qatar Investment Authority – Delta Two’s backer – is just £3.1bn. In other words, a considerable amount of the funding for this deal will be debt, just as it was in the earlier private-equity plan.
In fact Delta Two has organised debt facilities of £9.7bn – which on the face of it is considerable more than it needs and may suggest that the 600p price is just an opening shot.
However, I am sure Delta Two will claim that the equity element is in fact bigger than the £3.1bn, because it is also planning to raise £1.8bn through an issue of preference shares.
That said, it’s unclear if the prefs are long-term equity or redeemable capital that would rapidly be replaced by yet more debt.
Either way, it is easy to see why the two Sainsbury lords – David and John – are concerned that all the debt that would be heaped on the company could hobble the business created by their forefathers.
Nor will the two peers be reassured by another element in Delta Two's plan, namely that Sainsbury's £8.6bn of properties would be injected into a separate company - thereby presumably burdening the stores with incremental rents.
And it won’t just be the Sainsbury family which would be concerned about the impact on the business of substantial borrowings and the elimination of that cushion of rent-free freeholds.
The point is that the supermarket industry is being investigated by the , the competition watchdog. And, inter alia, it is looking at whether the market will remain as competitive as it has been.
So the Competition Commission will demand an assurance from Sainsbury’s executives that they could, for example, cope with a price war initiated by Tesco if they were also having to make huge interest and debt repayments.
This is not idle speculation. The Commission posed that precise question earlier this year when that private-equity takeover proposal was on the table.
So although I continue to think that Qatar will end up as owner of Sainsbury, I’m not sure it will do so on the basis of its offer as currently constructed.
If the Qatar government wants to own Sainsbury, it will probably have to borrow less and put up more of its own plentiful cash.
Update 19 Jul 17:45 A statement just put out by Delta Two confirms that its conditional offer is 600p per share, and that it put in a written offer to Sainsbury yesterday.
It says it is responding to articles in this morning’s UK press – which implies that it doesn’t listen to the ̳ or read our website, or it would have been aware that we were putting out all these details yesterday.
It is however a disingenuous statement, in that it makes no distinction between equity and “subordinated PIK shares and notes” (what I referred to in shorthand yesterday as prefs).
The plain vanilla equity in this deal is, as I said yesterday, just £3.1bn. It also misleadingly ignores Sainsbury’s existing net debt of £1.4bn, which won’t miraculously disappear if it succeeds in buying the company.
So after a Delta Two takeover at the proposed price, net debt of the business would be at least £7.4bn and closer to £9bn if the subordinated PIK and notes are viewed as debt or are likely to be replaced by debt.
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I don't understand why there are reports of a cash offer at 610p a share during most of the day and then we learn that the potential offer is 600p and loaded with debt. Are these kind of rumors normal for a quoted company? Can't we have a straight statement on what is going on? What are the PR people doing? it is non-sense.
If the Qataris succeed, the deal will mean that instead of occupying freehold stores, Sainsburys will operate from rented premises, no doubt subject to the usual upwards-only rent reviews every three years.
And where will the rent money come from? Customers, of course. And in a cut-throat business such as supermarkets, higher prices will inevitably mean lower sales and, in the longterm, lower operating profits. Particularly if investment in store improvements and product development - one the group's strengths, hitherto - are cut back.
But that won't worry the new owners: look how much money they will make from redeveloping stores which are forced to shut their doors in the face of competition from Tesco - and in some areas, possibly even Waitrose, which has an ambitious new boss.
Such a shame, but just one more example of the shortsighted approach which is now so common.
"The widely touted 610p..."
What, the 610p "revealed" by yourself in the earlier post?
Robert - why are you so nervous about Qatar investing money in the supermarket?
for Sainsbury, it is fantastic opportunity to stay in the market, if want to reach at par with Tesco and Asda..
Will the Qataris, who are moslem, stop Sainsburys selling alcohol?
If so, taken together with the effects of the increased rent bill, it can only greatly reduce the company's profitability compared to present levels, and benefit Tesco, Asda, Morrisons and the rest.
How long before Sainsburys follows Kwik Save into oblivion?
Hello? What about British interests these days? Money seems to be everything, regardless of where it comes from, it saddens me that yet again a British company falls into the hands of a foreign investor, a foreign government of such, that screams out 'WRONG' to me! I don't want to shop at a store owned by Qataris!!! Wake up Britain, get investing in your own goods again to keep this country floating!
There is no need for an apostrophe in the first sentence of the third paragraph. The correct formulation is:
'First things first'.
Basically - another instance where the public has no clue about leveraged finance and sovereign funds.
There are a number of foreign governments that are investing in the UK through these vehicles - Russia, China, OPEC Members... Many of these countries don't allow that kind of foreign ownership in their own interests - look at the Russian seizure of BPs interests recently (well - technically a purchase I believe - but only just) - Make of this what you will....
The news channels do a very poor job of explaining whats going on....
Its quite usual among retailers to split their companies into two - one to retail, the other as a property business - its good for the books!
It would be a shame to see Sainsbury's go in the long term, it's a quality brand.
Free Market Research.....
Why couldn't Sainsburys stay in the market without being taken over?
James.... Yes and interestingly Germany is looking hard at this problem and considering ways of stopping it. I doubt we will though.. We're not that bright.
"If the Qatar government wants to own Sainsbury, it will probably have to borrow less and put up more of its own plentiful cash."
Do you know that QIC has plentiful cash are you assuming it or just making it up (as usual)?
Robert Peston reckons "If the Qatar government wants to own Sainsbury, it will probably have to borrow less and put up more of its own plentiful cash."
While I’ve so far not found any clear evidence that Delta Two does indeed have a lot more cash available than they have so far put on the table, it certainly seems improbable that they would be unaware of the problems raised with CVC’s similarly "highly leveraged" takeover funding proposal earlier this year.
It seems probable that the terms released today will be further negotiated and I would expect the actual offer price-per-share to be higher, and possibly a more palatable funding proposition tabled.
I dont recall any protests when Wall Mart bought Asda, or when the Spanish bought O2 and BAA or even when the Japanese bought BOC.
People seem to have a Bee in their bonet when a Middle Eastern suitor buys a British company!!.
We had the same moans when P&O were bought.
If you have a gripe then make sure its on a level playing field.
to Arshad's comment
walmart is in the same business as asda
a german company called linde took over BOC. both companies operate in the same industry.
the spanish company Ferrovial that took over BAA is involved in construction and infrastructure. airports are an infrastructure business.
only the americans made a fuss about duabi ports taking over P&O not the UK. both dubai ports and P&O operate in the same industry, so they are cost benefits in merging.
get your facts right before jumping into some conspiracy theory.
the only protest about anyone (arab oil money or private venture capital) taking over sainsbusys is if they run the company to the ground like what has already happened to kwik save and allders.
those wanting to overtake sainsburys are only interested in taking over the freehold of their stores. once that happens sainsburys will disappear within 5 years.
to be fair to authors of 'the gripes' on this deal, they mostly relate to the impact of high levels of debt on the company, not the nationality of the owners
similar concerns were well documented for the recent takeover of boots which was a similar trophy uk household name business being taken over by a private equity fund
i therefore think your concerns are unfounded
Could we have some clarification as to the staff pension scheme? Will those of us looking forward to the JS pension get what we were expecting?
There is only one reason for this takeover bid : so that the property portfolio can be leveraged and the excess cash generated paid as dividends to the new shareholders. The businesses would then be saddled with an unnaceptable level of financial risk which, in the event of a downturn in trading, would cripple it.
Surley the time has come for the government to look to protect all the stakeholders of publicly listed companies rather than just constantly bending over backwards to please the City of London. There are many staff and pensioners of Sainsburys who have a stake in the long term financial health of a business to which the have given many years of hard work.
The offer at it stands from what i last read means the separation of the supermarket business from the current main asset the property, which means as a business sainsbury value will crash, then take into account the amount of debt involved and the current debt, means a very worrying potential for sainsburys to loose even more ground in the supermarket race, which they can not afford in the midst of the making sainsburys great again strategy, which is proving hugely successful as it under kings leadership.
The proposed investment in stores is also worth less year and in total than the capital already set aside by king for new stores/re-fits and thats with keeping hold of the property, so its a win-win situation. especially after the recent first quarter results showing et another consecutive quarter of growth, I reckon shareholders would be much better sticking with what they know and try to prevent this buy-out, and i hope that the sainsbury family are successful in fighting this bid.
Perhaps the main threat to this is robert teng.... whatever's stake in the company as he has already pushed for this type of splitting strategy in the recent past, and he suceeded in kicking up a fuss in the board room.
however my views are biased as Iam a employee at sainsburys, and iam proud of what we are acheiving, and delivering to our shareholders, and im not confident that the delta 2 proposal as i understand it is the best option
hello i love this website
yes diane, what will happen to the jacksons pension scheme??? and contracts too for that matter?? they can't even provide us with sainsburys uniforms can they??but going on the above hoo ha.. (apostrophes and all!!!!!)we will probably be getting new bosses first.
I have a lot of cash in Sainsbury's bank.
If a leveraged purchase of the business went through then I will transfer my money to somewhere less risky.
As someone who has a pension from Sainsbury's, and on which I shall be dependent for the next 10-30 years, I'm concerned about the security of the pension fund, if/when JS falls into the hands of the Qataris.
I think the pension fund trustees should be absolutely rigorous in safeguarding the pensions of all their retired and current employees who are in the company's pension funds.