It’s fair to say 2014 hasn’t been a great year for J Sainsbury (LSE: SBRY). Shares of Britain’s number two supermarket are currently trading some 24% below their 2013 high, achieved last November.
We’ve had the announcement that chief executive Justin King will be leaving the company in July, having revived what was an ailing business when he was appointed in 2004. And we’ve seen weaker sales figures recently, although still much superior to those of Tesco and Morrisons, which are more exposed to competition from hard discounters Aldi and Lidl.
While investors have little expectation of a re-rating of the Footsie’s unloved supermarkets any time soon, there’s one thing that could put a rocket under Sainsbury’s shares.
Remember 2007?
Merger and acquisition activity has been so bubbly of late that we could almost imagine ourselves back before the financial crisis. And we all remember what 2007 was like for Sainsbury’s, don’t we?
First, in February, a private-equity consortium led by CVC Capital Partners announced it was considering a bid for Sainsbury’s. During April, the consortium had an indicative offer of 562p a share rejected, and raised the offer to 582p a share, which was also rejected.
The bidders walked away, but before the month was out came an announcement that Qatar’s sovereign wealth fund Delta Two had acquired a 17% stake in Sainsbury’s. In June, the stake was increased to 25%, and, the following month, Sainsbury’s announced it had received a preliminary approach from Delta Two.
By September, Sainsbury’s and Delta Two were releasing a joint update on their discussions around a proposed cash offer of 600p a share. However, by November, the credit crunch was biting, and the required funding and cost of capital for Delta Two were increasing significantly. The Qataris pulled the plug on a deal.
Another bite at the cherry?
The Qataris haven’t gone away during the past seven years, but have been quietly sitting on their holding of 26% of Sainsbury’s shares. Whispers of a resurrection of a deal over the years have so far proved unfounded, but could the time now be ripe for the Qataris to have another bite at the cherry?
The table below shows some of Sainsbury’s key financials at 2007 and today.
| 2007 | Today | |
| Share price | 600p (proposed) | 317p |
| Market capitalisation (£bn) | 10.5 | 6.1 |
| Net debt (£bn) | 1.4 | 2.4 |
| Enterprise value (market cap + net debt) (£bn) | 11.9 | 8.5 |
| Market value of property (£bn) | 8.6 | 12.0 |
On the face of it, then, with Sainsbury’s market cap and enterprise value significantly lower today than in 2007 — and the market value of the company’s property significantly higher (almost double the market cap!) — the Qataris could be tempted to have another tilt.
Investment bank UBS thinks so, having tipped Sainsbury’s as a prime takeover target at the start of this year. Also, veteran retail analyst Clive Black ran the numbers a couple of months ago and concluded: “There is more merit now than has been the case for some years for Sainsbury’s largest investor to dust off ‘the file'”.
So, there’s potential for a revived Qatari bid (or a rumour of one) to put a rocket under Sainsbury’s shares and give investors today a quick profit. But I think, as I always do in these cases, that investors need to be happy to take a long-term position, and view a bid simply as a bonus.
