Around £1bn was added to the value of Sainsbury’s on Monday after reports that the supermarket chain could be the latest UK company to receive a buyout bid from a private equity firm.
Shares in the UK’s second-largest supermarket jumped just over 15% to 340p, reaching levels not seen since February 2014. Sainsbury’s was the day’s biggest climber on London’s FTSE 100 index.
The group is seen as the next potential target for foreign private equity cash after the recent bidding war for Morrisons drew investors’ attention to the larger UK supermarket chains.
Last week, the US private equity firm Clayton, Dubilier & Rice had its improved £7bn offer for Morrisons recommended by the board of the UK’s fourth-largest supermarket chain. That bettered the £6.7bn already on the table from rival suitor Fortress.
However, some in the City still have concerns about any Morrisons deal. Andrew Koch at Legal & General Investment Management said it now believed the true value of the property portfolio would be realised for shareholders, after the competing bids emerged. But he added: “We continue to look at other aspects of the bid, including commitments for the future management of the business.”
After the race for Morrisons, analysts consider Sainsbury’s to be the most obvious target for a buyer.
The US buyout firm Apollo is taking an “exploratory” look at company, according to the Sunday Times. It reported that Apollo has been scouting for targets in the industry after losing out last year in the race for the supermarket Asda, previously owned by the US retail giant Walmart.
Shares in Sainsbury’s have soared by more than 45% since the start of the year, when they were trading at about 226p, as a result of reports of possible bids.
The speculation began in April when the Czech billionaire Daniel Křetínský raised his stake in the company to almost 10%.
However, when asked last month if the Sainsbury’s board was in talks with potential suitors, its chief executive, Simon Roberts, said: “If we had anything to update on, we would be updating on it.”
The number of UK businesses acquired by US private equity funds has jumped by more than half in the past year, according to research. There were 65 acquisitions of British firms by US private equity in the year to 30 June 2021, up from 37 a year earlier, according to data from the global law firm Mayer Brown.
UK companies are being targeted because of their relatively depressed valuations compared with their European peers, Mayer Brown found.
The gap in valuations first came about after the result of the 2016 EU referendum, when the pound fell sharply against the dollar and the euro, and Brexit uncertainty dogged the UK economy, making takeover and acquisition deals more attractive for overseas buyers.
Sainsbury’s is “undeniably a good target for private equity with a considerable store estate, with the company having more than £10bn in property assets”, according to Neil Wilson, chief market analyst at the financial trading platform Markets.com.
“The Argos tie-up is another long-term growth lever and provides further scale, while profits are on the up again in the wake of the pandemic, and net debt has come down. It’s hard to beat those reliable cashflows,” Wilson said.
Sainsbury’s and Apollo declined to comment.
