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The FTSE 100 came within a whisker of closing on a six-year high yesterday after a trio of private equity groups announced they were considering a £9bn bid for J Sainsbury, the UK’s third biggest supermarket chain.

CVC, Blackstone and Kohlberg, Kravis, Roberts have yet to approach Sainsbury directly but such a takeover would be Europe’s biggest ever leveraged buy-out. However, any formal approach is unlikely to go unchallenged; Texas Pacific Group, the US buy-out firm, is understood to be working on a rival consortium, which could include Bain Capital, Permira and Cinven.

News of the potential bid sent the FTSE 100 up 0.46 per cent to 6,310.9 – a few points shy of a six-year high and sent shares of rival supermarkets such as Marks & Spencer and Tesco higher. European stocks also rose to their highest close in six years as French retailers Carrefour and Casino Guichard Perrcahon were lifted by takeover speculation.

Shares in Sainsbury rose 61¾p to close at 507p, the highest level in eight years and valuing the company at £8.7bn.

Ironically, analysts said the rise could make a deal too expensive for financial buyers. “I can’t see enough upside to pay the current share price and a premium on top of that,” Andrew Fowler, analyst at Merrill Lynch, said.

Sainsbury’s credit default swaps, which offer a kind of insurance against the non-payment of unsecured debt, rose to a mid-price of 82 basis points as credit markets feared the bid would reduce Sainsbury’s credit quality.

The CVC-led consortium has lined up debt financing from Goldman Sachs, Royal Bank of Scotland and Barclays Capital.

Sainsbury’s property portfolio is central to the consortium’s interest. It has hired DTZ, the property agents, to evaluate the estate with the aim of carrying out a sale-and-leaseback on the holdings, which analysts believe could be worth more than £7.5bn.

One major hurdle to a takeover in the past has been the Sainsbury family’s holding, which at one point was more than 30 per cent. This has now been reduced to less than 20 per cent, following the sale on Thursday of 40m shares owned by Lord Sainsbury of Turville, one of the group’s largest shareholders.

A blind trust set up to hold Lord Sainsbury’s shares will be disbanded later this month following his resignation as science minister last November. But any takeover will be made harder by the transformation of Sainsbury’s operating performance under the leadership of Justin King, who the consortium would like keep on as chief executive should their bid succeed.

Fitch, the credit ratings agency, warned that a highly-leveraged bid for Sainsbury could jeopardise the group’s existing sales-led recovery and cautioned that the exit route for the consortium was unclear.

A piecemeal sale of stores or a sale to a rival supermarket would likely be blocked by the Competition Commission, which is currently on its third inquiry into the grocery market.

Goldman Sachs and Lazard are advising the consortium. Sainsbury’s advisers are Morgan Stanley and UBS.

A private equity buy-out of Sainsbury, if successful, would dwarf earlier European deals. Last year a 3i-led consortium bought AWG, the water utility, for nearly $10bn and a group involving Blackstone and KKR paid $13.9bn for TDC, the Nordic telecoms group, in 2005, but an acquisition of the size of Sainsbury has only so far been seen in the US.

Top 10 European private equity deals
TargetBidderPrice ($m)Date announced
TDC (Denmark, 87.9%)Nordic Telephone Co 13,872Nov 30 2005
VNU (Netherlands)AlpInvest Partners; Blackstone Group; Carlyle Group; Hellman & Friedman; Thomas H Lee Partners; Kohlberg Kravis Roberts 10,998Mar 8 2006
AWG (UK)3i Group; Commonwealth Bank of Australia; CPP Investment Board; Industry Funds Management9,986Oct 2 2006
Philips Semiconductors (Netherlands)Kohlberg Kravis Roberts; Silver Lake Partners;AlpInvest Partners; Apax Partners; Bain Capital Partners9,480Aug 3 2006
Viterra (Germany)Deutsche Annington Immobilien 8,844May 17 2005
Canary Wharf Group (UK)Songbird Estates 8,312Dec 5 2003
ProSiebenSat.1 Media (Germany)Kohlberg Kravis Roberts & Co - KKR; Permira Ltd7,712Dec 14 2006
Siberian-Urals Aluminium (Russia)Russian Aluminium (Rusal) 6,600Oct 9 2006
TeleDiffusion de France (60%)Texas Pacific Group; Axa Private Equity6,234Oct 11 2006
Altana Pharma (Germany)Nycomed A/S5,725Sep 21 2006
Source: Dealogic

Additional reporting by Chris Hughe

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