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Does the rising Sainsbury’s share price mean a takeover is waiting to happen?

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The Sainsbury’s (LSE: SBRY) share price has put in an exceptional performance over the past year. twelve months ago, it was 202p, but it’s rocketed 46% to 295p today. A month ago, it spiked to 340p as investors anticipated a potential buyout in the wake of the Morrisons takeover battle.

While it’s since lost some ground, like fellow grocery retailer Tesco, I think the potential for a private equity bid remains high. 

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Encouraging Q1 Results

First-quarter results were broadly positive. Overall retail sales rose by 1.6%, excluding fuel, while two-year growth was up 10.3%. I think the effects of the pandemic explain this large rise. It makes sense that consumers who could no longer eat out would spend more in their local supermarket. But as revenue is still growing, it appears Sainsbury’s is holding on to those additional sales as society opens up. 

And it had some areas of far more rapid growth. Online grocery sales rose by 29% in the quarter year-onn-year, while two-year growth was at 142%. This suggests to me that the online shopping revolution that was supercharged by the pandemic is here to stay. And Sainsbury’s appears to be well placed to profit from this shift. Its trading statement said that “customer satisfaction in online is outperforming all of our superstore competitors, and we continue to gain online market share”.

Diversification and reinvestment

There are reports that Sainsbury’s is working with investment bank Robey Warshaw in anticipation of a potential takeover bid. It’s led to speculation running high around the Sainsbury’s share price.

I’m not surprised. I think Sainsbury’s has a successful, diversified business model. To start with, clothing sales were up 57% year-on-year in Q1. It believes that the growth is due to its strong offering in womenswear, seasonal and children’s clothing.

The retailer is planning on reinvesting its increased revenue to safeguard future profits. And it plans to sell its Sainsbury’s Bank arm to raise an additional £200m. The company appears to have a strong growth mindset. It acquired Argos back in 2016, which is now the third most visited e-commerce site in the UK. And Argos sales are up 6.7% over the past two years. 

Risks for the Sainsbury’s share price

Sainsbury’s has many of the same risks as its competitors. A key concern is the UK-wide labour and supply crisis. The UK now has 100,000 fewer lorry drivers than it had pre-pandemic. It’s left one of Sainsbury’s major distributors, EVCL Chill, on the brink of collapse. 

There’s even the possibility of food shortages at Christmas. National Farmers Union President Minette Batters recently said the food and farming sector was on a “knife edge”. And last month, The Association of Independent Meat Suppliers warned that there were 14,000 job vacancies. 

And then there’s the stiff competition in the supermarket sector. Low-price chains Aldi and Lidl are constantly nipping at Sainsbury’s market share. 

But I think the grocery retailer is a strong defensive stock in this inflationary environment. Regardless of potential setbacks over the winter, people will always need food. And I believe the chances of a private equity buyout remain high. So I think the current Sainsbury’s share price is attractive for my portfolio. 

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Charles Archer has no position in any of the shares mentioned. The Motley Fool UK has recommended Morrisons and Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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