DELTA TWO, the Qatari-backed vehicle bidding for the J Sainsbury supermarket chain, could be forced to stump up more than £1 billion of additional equity if it is to win boardroom backing for its £10.4 billion takeover bid.

City sources told The Sunday Times that the Sainsbury board wants Delta to increase the equity component of its offer before it can recommend a deal.

It is thought the board is worried the company would fall foul of regulatory scrutiny from the Office of Fair Trading were it overburdened with debt.

Increasing the equity element would also help to appease the supermarket’s pension trustees, who want Delta to inject up to £3 billion into the scheme.

It would also settle fears that the debt mountain could impede the supermarket’s competitiveness. The turmoil in the credit markets and the poor track record of food retailers following highly leveraged bids have also combined to put the spotlight on the issue.

“Everything points towards more equity,” said one well-placed source. “All the stakeholders are saying you cannot gear these things up too aggressively.”

It is thought that no official guidance has been given to Delta Two from the board on how it should restructure its bid. But well-placed sources said it would need to include at least £1 billion of additional equity.

Delta may also need to lift its 600p-a-share offer to win the backing of the Sainsbury family, which speaks for more than 18% of the shares. The family has stated that it is opposed to any highly leveraged offer.

Under the current bid structure Delta Two has just £3.1 billion of pure equity.

Another £1.5 billion is made up of quasi-equity, in the form of long-term financing known as PIK equity and preference shares. Analysts have questioned whether these should rightfully be classed as equity – rather than as a halfway house between debt and equity.

It is believed that Delta Two is reviewing its bid structure this weekend ahead of a crunch meeting with Sir Philip Hampton, Sainsbury’s chairman, on Wednesday.

It is thought both sides are hoping to reach a settlement one way or the other during the next two weeks.

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