Hear Siobhan Kennedy on Sainsbury's

The market value of J Sainsbury tumbled by more than £2 billion after the Qatar Investment Authority (QIA) abandoned its £10.6 billion bid for Britain's third-largest supermarket group, blaming the credit crunch.

The Times reported exclusively this morning that the Qatar-backed Delta Two fund would walk away from the bid.

In a statement, the fund said that, in light of significant increases in the cost of capital, a deal “would not be in the best interest of stakeholders”.

BACKGROUND

• Asda acknowledges cost of price war

• Bankers feel pinch as QIA ditch Sainsbury’s

• King’s rallying cry as managers count cost

• Qatari group poised to walk away from Sainsbury’s

• Small business 'dismay' at supermarket probe

Multimedia

• Hear Siobhan Kennedy on Sainsbury's

Robert Tchenguiz bruised but unbowed

The entrepreneur is nursing a £174m loss after the failure of a Qatari-backed bid for Sainsbury

BACKGROUND

• Report claims grocery monopoly is impossible

• Sainsbury’s suitor ranked second-worst in survey

• US to press for sovereign wealth funds restrictions

• Sainsbury’s chief eager to stay after takeover

• UK supermarkets accused of price-fixing

Related Links

• Tempus comment: Checking out

• Qatari group poised to walk away from Sainsbury’s

• Qatari split threatens to sink Sainsbury bid

Multimedia

• Hear Siobhan Kennedy on Sainsbury's

By late afternoon, Sainsbury's shares had fallen by 21 per cent to 439-1/2p a share, far below the Qataris' offer of 600p a share.

Some analysts predicted that the stock could fall as low as 350p a share, as any further bid prospects vanished.

Sources in Qatar had given warning over the weekend that a takeover was “highly unlikely” given the need for an additional £500 million of equity to keep the offer alive.

The QIA had until Thursday to launch a fully financed takeover offer under a deadline set by the Takeover Panel.

Justin King, the chief executive of Sainsbury’s, told staff before the weekend that he would be making an announcement before 5pm on Thursday.

In a statement today Paul Taylor, who runs the Delta Two fund, said: “Delta Two has strict investment criteria and has approached this opportunity in a disciplined manner.

“Having given careful consideration to the additional funding requirement and its impact on prospective investment returns, Delta Two has regretfully concluded that a recommendation to proceed with the proposed transaction would not be in the best interest of stakeholders, and therefore such a recommendation cannot be made.”

Delta Two launched its 600p indicative bid in July, but the takeover was caught up in endless wrangling between the QIA, which invests on behalf of the Qatari Government, the Sainsbury’s board and the supermarket’s pension trustees.

Having wrestled with the retailer's board for months to get the books open for due dilgence, the Qataris had been hopeful of concluding the acquisition by Christmas.

However, at the eleventh hour, it emerged that they would have to stump up an extra £500 million to meet the demands of the trustees, provide enough working capital and leave a “buffer” in the event of a fresh price war with Tesco and Asda.

The collapse of the deal will be a huge blow to the investment banks Credit Suisse and Dresdner Klienwort, which had advised Delta Two on the bid and stood to gain about £10 million or more each in fees if the QIA had won its prize.

It is understood that Mr Taylor had wanted to press ahead with the bid, but that the QIA had become more reticent about launching the offer.

The Qatari group already was putting £4.5 billion of its own cash into the bid, and it is thought that the move to add a further £500 million would have pushed the QIA's returns into single-digit territory.

Most private equity firms target returns of between 15 per cent to 20 per cent.

J Sainsbury insisted today that the board believed the supermarket group still had "great potential”.

In a statement, Mr King added that he remained focused on continuing to implement the Making Sainsbury's Great Again turnaround strategy, which has generated almost two years of consecutive like-for-like sales growth.

Mr King added: “Interest in Sainsbury’s has been borne out of the company’s success to date in implementing in its recovery strategy.”

Sir Philip Hampton, the chairman of Sainsbury’s, said: “Sainsbury’s has attractive future prospects and the recovery strategy commenced in 2004 is well advanced and continuing to deliver growth in the business.

“We have a first-class management team and colleagues to drive the business forward.”

Philip Dorgan, retail analyst at Panmure Gordon, said he believed that the shares would hold in the 450p to 500p range and raised his full-year forecast for Sainsbury's.

He said: "There are likely to be three immediate drivers for the shares. One, the shareholding of 15 per cent owned by Delta Two and the 10 per cent owned by Robert Tchenguiz; two, the stronger fundamentals in the stores; and three, there is bound to be some support from the belief that something else could happen, at some stage.

"We believe that management has done well to keep the business moving forward, despite the distractions."

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