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Sainsbury – the numbers

• Robert Peston
• 18 Jul 07, 03:20 PM

Sainsbury has now received a written, conditional takeover offer from Delta Two – which has been described to me as considerably less detailed and comprehensive than the spring proposal from the private equity quartet led by CVC.

And what’s striking about this conditional bid is how similar it is to that earlier private-equity offer.

First things first. The cash offer price is 600p, not the widely touted 610p – which puts a value on the whole business of £10.3bn.

Second, the hard equity from the Qatar Investment Authority – Delta Two’s backer – is just £3.1bn. In other words, a considerable amount of the funding for this deal will be debt, just as it was in the earlier private-equity plan.

In fact Delta Two has organised debt facilities of £9.7bn – which on the face of it is considerable more than it needs and may suggest that the 600p price is just an opening shot.

However, I am sure Delta Two will claim that the equity element is in fact bigger than the £3.1bn, because it is also planning to raise £1.8bn through an issue of preference shares.

That said, it’s unclear if the prefs are long-term equity or redeemable capital that would rapidly be replaced by yet more debt.

Either way, it is easy to see why the two Sainsbury lords – David and John – are concerned that all the debt that would be heaped on the company could hobble the business created by their forefathers.

Nor will the two peers be reassured by another element in Delta Two's plan, namely that Sainsbury's £8.6bn of properties would be injected into a separate company - thereby presumably burdening the stores with incremental rents.

And it won’t just be the Sainsbury family which would be concerned about the impact on the business of substantial borrowings and the elimination of that cushion of rent-free freeholds.

The point is that the supermarket industry is being investigated by the Competition Commission, the competition watchdog. And, inter alia, it is looking at whether the market will remain as competitive as it has been.

So the Competition Commission will demand an assurance from Sainsbury’s executives that they could, for example, cope with a price war initiated by Tesco if they were also having to make huge interest and debt repayments.

This is not idle speculation. The Commission posed that precise question earlier this year when that private-equity takeover proposal was on the table.

So although I continue to think that Qatar will end up as owner of Sainsbury, I’m not sure it will do so on the basis of its offer as currently constructed.

If the Qatar government wants to own Sainsbury, it will probably have to borrow less and put up more of its own plentiful cash.

Update 19 Jul 17:45 A statement just put out by Delta Two confirms that its conditional offer is 600p per share, and that it put in a written offer to Sainsbury yesterday.

It says it is responding to articles in this morning’s UK press – which implies that it doesn’t listen to the BBC or read our website, or it would have been aware that we were putting out all these details yesterday.

It is however a disingenuous statement, in that it makes no distinction between equity and “subordinated PIK shares and notes” (what I referred to in shorthand yesterday as prefs).

The plain vanilla equity in this deal is, as I said yesterday, just £3.1bn. It also misleadingly ignores Sainsbury’s existing net debt of £1.4bn, which won’t miraculously disappear if it succeeds in buying the company.

So after a Delta Two takeover at the proposed price, net debt of the business would be at least £7.4bn and closer to £9bn if the subordinated PIK and notes are viewed as debt or are likely to be replaced by debt.

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Qatar shops for Sainsbury

• Robert Peston
• 18 Jul 07, 08:00 AM

Most of us simply go shopping at Sainsbury.

However the prime minister of Qatar – or rather his investment vehicle Delta Two – wants to buy the whole company.

J Sainsbury will today receive a written takeover proposal from Delta Two.

It will value J Sainsbury at 610p per share, or £12bn for the whole business – including Sainsbury’s existing debt (so the market cap of Sainsbury at the proposed takeout price would be £10.6bn).

Here’s the funny thing: although the Qataris have very deep pockets, the structure of this deal is still very much like the private-equity approach from CVC and its partners that flopped earlier this year.

Or to put it another way, Delta Two is proposing to borrow some £8bn to fund this deal.

What that means is that the trustees of Sainsbury’s pension fund will again feel somewhat anxious about the proposed takeover – and are bound to insist that Delta Two put a good wodge of cash into the pension scheme.

Another obstacle is that the two Lord Sainsburys – David and John – don’t like the look of what’s on offer. They’ve just been out to Sardinia to meet Paul Taylor of Delta Two and have returned reluctant to sell out to him.

However, they and close members of their family control no more than 14.5 per cent of the company (and including more distant cousins, all Sainsbury family members control 18 per cent). So they probably can’t block the deal - though they can be pretty obstructive to Delta Two, given that it will probably want to obtain control of at least 75 per cent of Sainsbury (for technical reasons it probably needs that much, given how much debt Delta would inject into the company).

So this feels to me like the final instalment in the soap opera of Sainsbury’s takeover talks.

It would be very hard for Sainsbury’s board to tell Delta Two to hop off, because the price it’s offering represents a significant premium to the £8.6bn value of its properties and also puts its shares on a ratio of price-to-earnings well above the industry average.

Sainsbury may soon find itself a de facto branch of the Qatari Government.

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