Sainsburys – a missed opportunity?

For some time now Delta Two, the Qatari backed investment vehicle has been circling J. Sainsbury. Yesterday we learned they have entered into formal talks with the company’s pension trustees and its advisors. Is this icon of UK retailing one step nearer to falling into foreign ownership?

The “traditional analyst’s” point of view is that the return on the likely full value of the assets is low, even though Justin King’s recovery plan has improved performance and restored value to the share price. This argument continues that if the value of assets can be unlocked in some way to the benefit of shareholders then it has to be a powerful consideration. Additional persuasion suggests that shareholders, especially the Sainsbury family and trusts, would consider selling out at this time because they had a severe fright previously when market share, profits and shares plunged and there are no Sainsbury family members involved or likely to be involved in the business.

These arguments have been deployed by Delta with their “indicative” offer at 600p per share, against a current price of 574p, a premium of just 4.5% as things stand (though the share price is likely to still include some further potential takeover premium). The precise structure of Delta’s proposition is as yet not clear but it will be based on taking on significant debt with Sainsbury’s assets as the key collateral. In effect the purchaser will use the seller’s assets to finance their bid – in macro-economic terms, arguably, a reduction in the overall wealth of the UK.

All this is based on “traditional” thinking together with the business and financial analysis and the behaviour that results from this. We have looked at the different insights that come from using the Competitive Strength perspective. This gives a radically different and challenging alternative view and asks - Are the Sainsbury’s shareholders going to forego the longer term opportunity to see 800p or more for their shares for the sake of quick cash based on a real value diluting financial manipulation?

The Competitive Strength assessment suggests that, given the real potential value of the business, the Delta valuation is derisory. We must ask whether Sainsbury shareholders should even consider any offer at the current level. Or do they genuinely believe that their management cannot ever deliver the real potential value in the business? Delta appears not to think so (see below).

For some time after it became the market leader Sainsburys remained in a “Comfortable” competitive strength condition. Then market conditions changed, the competition hotted up and Sainsburys quickly fell back into a “Constrained” condition. Under Justin King they have climbed back to “Comfortable” with signs of the potential to move on to “Excellence”. This is why Justin King himself has stated that they are only about halfway through the recovery plan. But does even he appreciate the full potential value that the business could deliver?

We know from the research by Vinod Singhal that “Excellent” businesses can deliver double the profitability and financial returns of those in “Comfortable” competitive strength conditions. Suppose Sainsbury shareholders decided to ignore takeover approaches and instead charged their management with rapidly and effectively moving the business towards Excellence. The research tells us that you could see the share price achieving 800p in the short/medium term and up to £10 thereafter with greater Competitive Strength enabling more and more strategic choice for the business. In addition, they would still have the assets, unencumbered and available to serve the best interests of shareholders, employees and the pension funds.

The research is rock solid, if you don’t know about this then you should read this. The only question is can the management deliver? Delta seems to think so as by all accounts retaining Justin King is central to their plans. Are Sainsbury shareholders about to miss their big opportunity and hand over all their business’s accumulated wealth to Delta and is this what Delta are counting on?