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The outcome of Delta Two’s bid for Sainsbury rests in the Qatar Investment Authority [QIA]’s hands as the Qatari backer processes a request for GBP 500m of additional equity financing. This was said by people close to the situation on Tuesday.
Sainsbury shares are down 6% to 547p since Friday’s announcement, but there were no indications on Tuesday that either side considers the 600p proposed deal to be in jeopardy, as long as QIA approves the additional funding in time.
Delta Two has already said that QIA would support and develop the business through further equity investment. The QIA has to pass Delta Two’s request through its internal approval mechanisms in the same way as any investment fund and this takes a certain amount of time, it was explained. A spokesperson for the QIA declined to comment.
People close to the deal said it was worth noting that last week’s request to the Takeover Panel for a bid deadline had been made jointly by Delta and Sainsbury, rather than being imposed by the Panel.
This date would not have been agreed if Delta Two did not think it was achievable, it was said from the bidder camp.
The debt financing in Delta Two’s offer “is still fine”, one person noted.
A Sainsbury’s spokesperson would not comment on the developments that led to the request for a deadline. However it was suggested that Sainsbury’s board would have wanted to update the market and apply for a deadline after Delta Two reported back to them after its month of due diligence and finding that it needed more equity.
The application to the Panel was made jointly and both parties are happy with the 8 November deadline, said people on both sides.
Neither side is expecting the deadline to be extended, but should this be necessary it would need the approval of the Panel. A person on the target side said there was “no feeling they [Delta Two] are less likely to make a bid.”
Delta Two has not given a breakdown of why it needs the extra GBP 500m. While recent press articles have speculated on the cause, it was pointed out that there is still no settlement with the pension trustees.
Delta Two has held constructive talks with the trustees and is understood to have “reasonable visibility on where the end package will come out,” although it has yet to finalise the settlement. The bidder is keen to be seen to be acting responsibly.
Other theories about why the money is needed include higher debt financing costs if the pension trustees are secured as senior creditors; and higher costs if Sainsbury suppliers tighten their terms of trade to offset leverage risk.
The notion that supplier terms had not been factored in by Delta Two during due diligence was dismissed as “farcical.” A report that Qatar’s prime minster and the cheif execuive officer of QIA, Sheikh Hamad Bin Jasim Bin Jabor Al-Thani, was growing weary of the talks and looking for a way to exit was similarly played down.
It was suggested from the bidder camp that the GBP 500m request could simply be viewed as an early draw-down from the bidder’s existing commitment to provide future equity.
In the Delta Two/Sainsbury joint statement on 20 September, the bidders said: “Delta Two and the QIA would expect to manage the capital structure flexibly in response to opportunities and challenges encountered by the business. In this regard, Delta Two and the QIA will, where appropriate, support and develop the business through further equity investment.”
Should an offer be made, it is possible that key shareholders such as the Sainsbury family and Tchenguiz’s R20 holding could be consulted by the board prior to any recommendation.
If the GBP 500m equity is agreed, it may help address regulatory risk if the Office of Fair Trading questions Sainsbury’s gearing and ability to withstand a price war from rivals such as Tesco, the bidder camp argued.
The OFT is not a financial regulator and would therefore be guided by the Sainsbury board in assessing any threat to competition resulting from the supermarket group’s financial robustness. Sainsbury’s board has already scrutinised Delta’s financing proposals and decided it could open the books. Delta Two’s decision to put in more equity at its own request would only help with the board’s assessment of an eventual offer, the bidder camp argued.
The view from the bidder camp was that there remains a good level of commitment to do the deal. The view on the seller side was that it all depends on the Qataris approving the additional financing. “If they come up with it, it’ll be alright on the day,” said one person.
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