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Predators stalk J Sainsbury

Published:  23 July, 2008

Britain's third-largest supermarket group, J Sainsbury, is on bid alert following the announcement from a consortium of private equity groups that they are in the early stages' of a possible takeover bid. City analysts believe that to be successful a bid would have to be above 11 billion.

Sainsbury's shares have been rising steadily as the improvements introduced by Justin King, the chief executive, have started to bear fruit, but the possible bidders, CVC Capital Partners, Kohlberg, Kravis Roberts and Blackstone, believe it is worth much more to them.

The speculation is that they would sell the Sainsbury stores and lease back the properties to continue trading. This would release a pile of cash but burden the operating business with extra overheads from rents. They would then expand Sainsbury's range into clothing, electricals, and health and beauty products, which have much higher margins than standard grocery lines. Tesco, for instance, derives 6.5 billion or 20% of its UK sales from non-food items.

If the strategy worked and Sainsbury increased both its market share and turnover, it would then become a more valuable business for the private equity consortium to sell on at a later date. A bid is still a long way off and the consortium is known to feel that news of its interest leaking could send Sainsbury's share price above the level at which it would bid. Even so, rumours of a rival private equity consortium or even Carrefour joining the fray cannot be dismissed.

Whatever happens, the Sainsbury family will exercise considerable influence over the outcome, even though its stake has been reduced recently.