Delta Two deal signals change of direction for Sainsbury’s

SainsburysbagThe wait could finally be over for Sainsbury’s if the supermarket group’s board recommends accepting a £10.6bn takeover offer by Qatari investment group Delta Two. The deal is expected to get the green light this week – if agreement can be reached with the group’s pension fund trustees.

But the industry is undecided about the implications of a possible deal for Sainsbury’s, which has enjoyed a renaissance in the past two years under chief executive Justin King.

Nick Gladding, lead analyst at Verdict Research, says King has helped broaden the appeal of Sainsbury’s by improving customer service and being aggressive on pricing. It is thought that King will remain as chief executive if the Delta Two deal goes through.

The takeover could be a good move for Sainsbury’s, according to Mike Godliman, a director at Pragma Consulting, because it will provide much-needed investment for older stores and the back office infrastructure. A break from the Sainsbury family could also give the company a new sense of freedom, according to another analyst.

But many believe Delta Two is likely to be the bigger winner. Jose Marco-Tobares, a retail analyst at Numis Securities, thinks the grocer is undervalued by 10% and says it is the Sainsbury’s property portfolio – valued at £8.6bn – that the Qataris are most interested in.

Others feel it is the Sainsbury’s business model that is most attractive for a group eager to diversify beyond oil. Food is often seen as recession proof and Gladding adds: “Sainsbury’s is profitable. It’s a solid business and the hard work in terms of turning the company around has already been done.” 

Marco-Tobares believes there is enormous potential for growth in the UK. “There’s potential for improving the margin in food by getting into healthier food, for which Sainsbury’s has a good reputation,” he adds.

However, Godliman disagrees, saying there is limited scope for expanding in the UK. He thinks taking the brand overseas would be the obvious next step, pointing out that there are opportunities in food retailing in Central and Eastern Europe, the Far East, Asia and to a lesser extend the Middle East. “In India and China there’s a growing middle class that would be a good fit with Sainsbury’s profile,” adds Godliman.

British brand
But Sainsbury’s is a very British brand that has experimented with overseas expansion before with little success, according to Gladding: “It’s very difficult going abroad and you have to have a clear vision. Sainsbury’s is in the middle market and it’s difficult to communicate that in a new market.” 

He adds that, as with all mergers, the deal is not without pitfalls for the grocer. “There’s always the worry that there’s been so much going on [with the takeover] it could lose its competitive edge,” he says. “Tesco is much more aggressive on pricing and there’s a danger that Sainsbury’s will slide behind the others.” 

There is also a danger Delta Two will eventually want to separate the property portfolio from the business. It is an unlikely move but one that rival bidder CVC, a private equity firm, attempted earlier this year before aborting its bid. There are fears that higher long-term rental costs will be passed on to customers.

Sainsbury’s has rarely been out of the spotlight in recent weeks, with the announcement it will move to a new headquarters in London’s Kings Cross and a much-derided rumour that Marks & Spencer is working on a counter takeover offer. Godliman says: “Sainsbury’s is in a good position. It has sorted out its problems and is now a well-run company with a good market position. The question is where next?” 

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