Fool's Eye View

[ March 6, 2000 ]

Somerfield On The Market

By Nigel Roberts (TMFNigel)

Chippenham, Wiltshire -- After months in the doldrums Somerfield (LSE: SOF) shares perked up today after the announcement that the company was in talks that could lead to an offer for the company. This news came on the back of speculation in this morning's FT that its chief executive David Simons was looking to take the company private. The company said the interest had come from a third party, unconnected with the management, and that they have since "extended discussions to a limited number of other parties." It is thought that a number of venture capital companies are interested, including the Japanese bank Nomura and American firm KKR (Kohlberg Kravis Roberts -- no relative I can assure you!).

You have to feel sorry for long-standing investors in Somerfield. The company listed on the London Market in 1996 at 145p, with the shares eventually reaching a high of 460.5p in 1999 after it bought KwikSave -- a deal that now looks to have been quite wonderfully badly timed in that it has effectively destroyed shareholder value at an unprecedented rate.

Despite today's 30% rise the shares are still trading at only 80p, valuing the company at £390 million. Presumably the fact that the business has a net asset value (NAV) of about £640 million is what is attracting the interest -- of course if a bidder is simply looking to strip out all of the assets of the business, selling 1,500 stores may prove an obstacle to getting a quick return.

The company is already embroiled in a process of turning its self into a "corner grocer" by selling off a number of its largest supermarkets to its bigger rivals. An Extraordinary General Meeting is due to be held today to approve the sale of 45 of its stores to Waitrose (part of John Lewis), the Co-operative Wholesale Society, Tesco (LSE: TSCO), Asda (owned by Wal-Mart (NYSE: WMT) and J Sainsbury (LSE: SBRY). The aim is to sell a total of 450 of its largest Somerfield and Kwik Save stores, leaving it with about 1,000 smaller stores.

There certainly does appear to be value in the potential to sell of the stores, in particular the bigger ones. Of the 45 larger stores they are selling immediately, they have signed contracts to sell 19 for £135 million and agreed terms on the other 26 for £170 million, giving a total of £305 million, compared to a book value of £172 million. If they are able to realise similar premiums to book for the balance of the stores that they are looking to sell then the company, or any buyer, may well find itself with a very nice profit, and a potentially nice little on-going business.

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