Friday Letter: Try something new today

Sainsbury’s, the number three UK grocer with a market share of almost 15 percent, should begin preparations for a siege.  

CVC Capital Partners, Kohlberg Kravis Roberts and The Blackstone Group, three of the world’s biggest buyout groups, are mulling an approach for the UK’s third-largest supermarket.

If successful, it will be Europe’s largest buyout and the first private equity kill of a FTSE 100 business. Sainsbury’s current market capitalisation exceeds £8 billion.

The consortium will be kicking itself that it was forced to show its hand prematurely by the UK takeover panel, a regulatory body with responsibility for UK M&A, which had noted a dramatic move in Sainsbury’s share price.

And premature is the word, according to one source behind the scenes. The buyout firms were still assessing the potential for a deal and there is no guarantee of it becoming a full-blown approach.

But if it does, the buyout firms had better gird themselves for a fight.

As one UK analyst said: “This is just the opening shot and there is going to be a hell of a fight. Don’t think for a moment they will be nicking an iconic brand like this on the cheap. I cannot see the institutions giving it up.”

When a retailer like HMV, the UK music and video chain, feels emboldened to rebuff the buyout shilling (as it did last year), you can bet Sainsbury chief Justin King and his team are not in a rush to pick up the phone to CVC and friends.

The restructuring of Sainsbury’s and the turnaround in the store’s fortunes is well under way and investors are mostly satisfied with the progress.

Sainsbury’s has already squeezed some of the juice out of its property portfolio. Last March, it sold more than £2 billion (€2.9 billion) of bonds backed by commercial mortgages on 127 of its properties. As a result, there would be less freehold for private equity buyers to play with.

Meanwhile King’s operational gambit has more than delivered on the £2.5 billion of incremental sales he promised in the three years since his strategic review in 2004, shortly after he joined.

There were however some dissenting voices as progress appeared to slow at the beginning of the year and even supportive investors are eager to see the additional sales convert into greater profits and more cash. But is there enough dissatisfaction for the buyout team to deliver a deal?

Still, there are a few chinks of light for the consortium. Step forward Simon Laffin, CVC’s retail guru and former chief financial officer for 10 years of Sainsbury’s one time FTSE100 rival Safeways. Laffin joined CVC in September 2005. He’ll be at home with the ways of the buyout now and he is steeped in UK retail. If anyone can persuade a retailer of the joys and freedom of a buyout, it is him. 

Also, the second largest shareholder in Sainsbury’s with around 11 percent is the US institutional investor Brandes, a supporter of Philip Green’s flawed bid for M&S and not as scarred by its exposure to private equity as some UK institutions have been.

The most significant piece in the puzzle remains the Sainsbury family itself with around 37 percent of the stock. Its intentions are unclear. But if it chose to sell together with Brandes, the consortium would be practically home and dry.

The family may decide to follow the group’s marketing and “try something new today”. If they do, the proceeds from exiting the business would give them plenty to play with if they fancied diversifying into, say, private equity.