Twelve days ago David and John Sainsbury got up early to make a special trip.
The cousins – both peers of the realm – were driven to Farnborough airport,
where they met Lord (Jacob) Rothschild and boarded a Hawker 800 business jet
to fly to Sardinia.
The noble trio were not on holiday, but heading for a meeting with Sheikh
Hamad bin Jassim, prime minister of Qatar. Their plane had been leased by
Paul Taylor, his British investment adviser. The sheikh had a simple
proposition for his guests – he wanted to buy J Sainsbury, Britain’s
third-biggest supermarket chain, and he wanted their help to pull it off.
The Sainsburys are crucial to his plan. Their family started the firm and they
remain important figures, together holding about 14.5% of the shares, with
the wider family holding another 3.5%. Without their support, the sheikh
knew that he faced a difficult battle – a point proved a few months earlier
when combined family opposition defeated a bid led by CVC, the
private-equity company.
On landing at Olbia, on Sardinia’s exclusive Costa Smeralda resort coast, the
trio were chauffeured to the luxury Cala di Volpe hotel and ushered into a
restaurant that had been cleared of other guests.
Over the next two hours, the sheikh and Taylor told the Sainsburys why they
were interested. They did not plan job cuts but wanted Sainsbury to bloom.
They pledged to open new stores, refurbish and redevelop old ones and to
take it global by utilising the sheikh’s extensive contacts in the Middle
and Far East. The Sainsburys listened but gave no definitive view – at that
point not all details of the proposed bid were divulged. “They agreed on
more than they disagreed on,” said a source.
The following evening – July 11 – Sir Philip Hampton, the Sainsbury chairman,
met Taylor at the Hanover Square office of Delta Three, the management
company he set up to advise the Qatari Investment Authority. Taylor told
Hampton of the takeover proposals.
A week later, news of the meetings leaked and on Wednesday morning “Project
Aquarius” was thrust into the open. Delta Two, the Qatari bid vehicle,
confirmed to the stock exchange that it was planning an offer.
It was still early days. But by 10.25am a detailed proposal from Delta Two had
been couriered to Sainsbury’s head office in Holborn, setting out the
details of a 600p-a-share indicative proposal, valuing the company at £10.4
billion. Delta Two also biked over a personal letter from the sheikh. Two
investment banks, Dresdner Kleinwort and Credit Suisse First Boston had been
lined up to advise Delta Two. Twenty four hours later details of the funding
were announced.
A takeover would be financed with £4.6 billion of equity and £6 billion in
debt from a banking syndicate comprising Dresdner Kleinwort Wasserstein,
Credit Suisse First Boston and ABN Amro.
At 4pm on Wednesday the Sainsbury board met to discuss the offer. Justin King,
its chief executive was present. From now on he will be excluded from
meetings discussing the proposal to avoid a conflict of interest. In the
event of a takeover, King could be in line for £10m under his existing pay
deal, and that figure could be dwarfed by any package offered by the Qataris.
As when the Sainsburys met the sheikh a week earlier, the board meeting was
inconclusive. The directors want to be sure the Qataris can deliver and that
the price is right. They also want to see whether members of the group’s
pension schemes will be properly looked after. Directors will also, like the
sheikh, be trying to divine the intentions of the Sainsbury family. FOR a
company that now boasts two peers in its founding family and is a household
name, J Sainsbury has humble origins. In 1869 John and Mary Sainsbury opened
a small dairy at 173 Drury Lane – now the heart of theatreland but then one
of London’s poorest areas. By 1882 there were four shops and a depot to
supply them in Kentish Town. In that year John made the business move that
set the tone for future development – he opened a store in the middle-class
suburb of Croydon. It was more richly decorated than his existing outlets
and sold higher-quality goods.
The family owned the company until 1973, when it floated on the London Stock
Exchange in what was then the greatest public offering of shares in Britain.
For most of the 1980s and 1990s it was the undisputed No 1 food retailer,
but lost the top spot in 1995 to Tesco, which has never looked like
relinquishing it.
Since then Sainsbury has fallen to third place behind Asda, but a revamp by
King in 2004 appears to be shaking the company up. It now employs 153,000
people in 783 stores. Its slide to No 3 made it a perennial target of bid
rumours – which became reality this year when a private-equity consortium
made an abortive offer.
The Qataris hope for more success. Analysts say the proposed price is in the
right zone. It values Sainsbury at a whopping 33.5 times 2008 earnings,
putting it on a higher rating than some of the world’s fast-est-growing and
higher-margin fashion retailers – not to mention at a significant premium to
Tesco, the sector leader that is trading at just under 17 times prospective
earnings.
Even so, a 600p-a-share offer may still not be enough to persuade John and
David Sainsbury to sell up. They have already made clear their opposition to
highly leveraged deals and will demand greater clarity on how the bid is
financed and who is providing the equity. It is thought they believe a share
price of more than 700p could be achievable over the next two to three years
in the public markets. They would also, no doubt, point out that the
company’s own investment plan – £2.5 billion over the next three years,
represents a higher run-rate than the Qatari proposal, which envisaged £3.5
billion invested over five years. The Qatari bid, like that of CVC before
it, has a 75% acceptance threshold. At that level it is possible to delist
the company from the stock exchange. It also gives greater comfort to the
banks that are providing the debt finance, opening the door to more keenly
priced loans.
Even if the Sainsbury family cannot be won over, Delta Two may conclude that
it still has a chance. Unlike CVC, the Qataris have a big advantage – they
already own 25% of the business and are the largest shareholder.
Robert Tchenguiz, the Iranian property tycoon and Taylor’s former employer,
holds a 5% stake and a further 5% through derivatives called contracts for
difference.
Tchenguiz has been agitating for Sainsbury to hive off its £8.6 billion
property portfolio into a separate entity, splitting the company into an
operating company and a property company. The board has firmly rebuffed his
proposals. If Tchenguiz cannot reverse their opposition, he will be sorely
tempted to sell to Taylor and take a profit on his stake. EVEN if the
directors and the family do agree to sell, there remains a potentially
formidable obstacle. The Sainsbury pension trustees will probably have to
give their blessing if the deal is to go through.
Head of the trustees is John Adshead, who had a spell as human-resources
director when David Sainsbury was still running the company.
Regarded as a formidable individual, he would probably have preferred to have
been consulted at an early stage on the bid proposals, and this week
demanded a meeting with the Qataris.
Luckily for Delta Two, the pension deficit has narrowed from £431m in the
2005-6 financial year to only £55m, which should make it easier to strike an
agreement. And even if the twin hurdles of the Sainsbury family stake and
the pension fund can be overcome, the transaction will inevitably face
political scrutiny.
It took less than 48 hours, from the bid proposal being announced, for the T&G
trade union to urge the government to step in and block the takeover. “How
on earth can it be in Britain’s interest to allow Sainsbury to become the
nationalised property of a Gulf state?” said Brian Revell, the T&G’s
organiser for food and agriculture.
Ministers are unlikely to intervene. The government has good relations with
Qatar, which is regarded as a key ally in the Middle East, and all Britain’s
political parties are reluctant to appear protectionist. Given that the
Spanish company Ferrovial was allowed to buy Britain’s biggest airports with
a highly leveraged deal, there can be little justification for blocking a
supermarket takeover, the argument goes.
Analysts believe that King has done a good job turning around Sainsbury. Under
him, profits and margins have recovered – but not enough for some investors.
Critics snipe that Sainsbury could have made more profit by getting a 5%
yield from its property portfolio or by selling the assets and putting the
cash into a high-interest savings account.
The business is now faced with the problem of having three different groups of
shareholders – Tchenguiz, Delta Two and the Sainsbury family itself – all of
whom want different things.
“This is the point of no return,” concluded one observer. It is difficult to
disagree.
ONLINE SALES ARE SOARING
HIGH-STREET RETAILERS may be feeling the squeeze but online sales are booming.
J Sainsbury is one of the beneficiaries – sales from its website are running
at £5m a week and are up 48% on a year ago. The service is doing so well it
recently announced new three-year targets to expand its online home-delivery
service from 114 stores to 200.
New figures from the internet research specialist IMRG shows that internet
shopping sales in June were 55% higher than a year earlier – the highest
rate of growth for four years and close to the record achieved last
December. Online sales last month topped £3.5 billion – more than London’s
West End takes in a year. Food sales remained strong, but electricals were
the star performer, up 92% in June on the previous year as shoppers snapped
up cameras, iPods and laptops ahead of their holidays.
“This astonishing growth shows that all shopping is entering an entirely new
phase,” said Jo Evans, managing director of IMRG. “Thanks to the internet,
shoppers are getting used to finding and buying goods and services in new
ways. Consumers have tasted e-power and are well and truly hooked.”
