And we're off! The Financial Times reports today that Delta Two has offered 610p a share for Sainsbury's, valuing the supermarket group at about £12 billion. Sainsbury's has not made a statement yet, but the family or management are understood not to support the bid. This would be consistent with their position since the bid by CVC was rebuffed in April. The FT says "Delta Two is now considering two options: making a full-blown takeover bid or using its shareholding to force a restructuring of Sainsbury’s property portfolio." This would require the support of Robert Tchenguiz who has a declared 5% stake in the grocer, although this is likely to be closer to 10% with derivatives. That support would almost certainly be forthcoming given his previous vocal support for an Opco-Propco arrangement that would return cash to shareholders.
What will happen over the next few weeks could be influential not just for the future of the Opco-Propco model in retailing, but for REITs, private equity investment and the UK grocery market. Speaking in June, chief executive Justin King, while saying he had a “completely open mind” about using property to issue commercial mortgage-backed securities, said it would not be in the best interest of the group to split into a property company and operating company. Property Director Peter Baguley was more forthright about the prospect at Estate Gazette's Retail Summit in May, saying that "no one shareholder" was going to dictate company policy in a thinly-veiled dig at Tchenguiz.
It may seem that the sensible advice would be of the "if it ain't broke" variety. But let's remember that we're not just talking about money here. We're talking about a LOT of money. When Sainsbury's revalued its property portfolio in spring, it stood at £8.6 billion, a massive 65% above the book value. The possibility of returning a large amount of cash to shareholders looks easy, especially when the company is basking in the feelgood factor of its successful recovery. How long that recovery could be sustained if such a move did take place looks less certain. UBS warned in May that establishing a separate property company would reduce profit margins and the supermarket would be at greater risk from competitors' price reductions. In June, the management team announced a strategy to acquire more of the freeholds and long leaseholds on its stores, such as those in Bournemouth and New Cross, the latter acquired with adjacent sheds for £47.7 million in May. It has plans to spend £2.5 billion, funded by operational cashflows, to develop more than 50% of its property estate, building extensions on 75 of its supermarkets, developing 30 new supermarkets, 100 new convenience stores and refurbishing 190 existing stores. The property portfolio is unquestionably at the centre of plans to consolidate and improve its position. There is a possibility that a compromise might be reached with a portion of the property portfolio released, but that might not be enough for the shareholders and any significant portion would compromise development plans. This is not going to be resolved easily. In fact it may be nasty and brutish. But not short. Pass the popcorn.