Sainsbury's new deal
Any day now the attempt by Delta Two to acquire will either become a formal takeover or it will implode.
My hunch is that this investment vehicle of the Qatari state will sweeten the terms just enough for the Sainsbury board to recommend the offer.
What has been at issue is not the price. That will remain at the mooted level of 600p per share or £10.4bn for the lot. The enterprise value for the bought-out business, to include its existing debt of £1.6bn, would be £12bn.
It has been the amount of equity to be deployed by the Qataris, as opposed to debt, that has for weeks been preventing the board from giving its assent.
Negotiations have reached make or break.
Here is my prediction. The amount of pure equity in the deal will rise from around £3.1bn to about £3.8bn. The pref element will be unchanged at £500m and there will be a reduction in payment in kind notes from £1bn to around £700m.
The net effect will be to increase the equity element of the deal from £4.6bn to circa £5bn - and there will be a reduction in the prospective indebtedness of the bought-out Sainsbury from £7.4bn to £7bn.
That matters for two reasons. First, the supermarket chain's eponymous founding family - which controls 18 per cent of the stock - was reluctant to sell out if there was a risk that their baby would be drowned in debt.
Second, the competition authorities would be concerned if Sainsbury's future ability to compete with and were impaired by the burden of debt repayments.
So is Delta Two doing enough to satisfy the that there would be no need for a formal investigation by the ?
It's touch and go. One relevant factor is that the Competition Commission is nearing the end of a wide-ranging review of the supermarket industry, which - inter alia - will address the question of whether Tesco has or may become too powerful.
It would be hard for the OFT to wave through the Sainsbury takeover if there were a risk that its ability to keep up the pressure on Tesco would be constrained.
Make no mistake, £7bn is a big chunk of debt. Annual interest payments alone for Sainsbury would increase from a few tens of million pounds right now to around £500m, or well over half earnings before interest, depreciation and amortisation.
The increased debt would wipe out a substantial part of Sainsbury's cash flow. And if Tesco or Asda were feeling especially ruthless (when would they ever?) they could slash prices in an attempt to wipe out Sainsbury's cash flow altogether and hobble it for the long term.
Now the Qataris may protest that they would never allow Sainsbury to be crippled. They may wish to point out that as an oil rich sovereign state, they have almost limitless resources to invest in Sainsbury.
But that may be disingenuous. The crucial point is that they have chosen to construct this deal in the way that a private equity buyer would have done, by loading it up with tons of debt.
In other words they are reserving the right to allow Sainsbury to go bust.
If the Qataris really wanted to hold Sainsbury for the very long term, they would have bought it with closer to 100 per cent equity - because in the long term the returns from an equity-heavy structure would converge with the proposed leveraged structure.
In choosing to take the leveraged route, the Qataris leave the Office of Fair Trading little choice but to view them as normal commercial owners.
So the Catch 22 for the Qataris in choosing to use aggressive financing techniques to maximise short term equity returns is that they have also increased the probability that they may never harvest those returns - because the Office of Fair Trading may feel obliged to throw a spanner in the works.
The OFT will, of course, take account of advice from Justin King, Sainsbury's chief executive. I expect him to tell the competition watchdog that the group can thrive even if yoked to £7bn of debt.
However he'll be £10m or so wealthier if the takeover takes place. I am sure King would never knowingly permit his judgement about the merits of the deal to be impaired by the attractions of that glorious payday. But the OFT may spot a conflict of interest.
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This seems pretty outrageous. How can a reduction in debt of around 5% be described as sweetening the deal? A deal structure of this kind doesn't suggest that they really have the best interests of Sainsbury's, its pensioners and customers at heart. If they really wanted to be in the grocery business they'd put their hands in their impossibly deep pockets and pay cash.
It seems to me that the key piece of information is in the last paragraph - of course Justin King will recommend the deal if it makes him £10m and it would be hard to blame him for doing it. Who wouldn't? The problem is that he should be in that position without any threat of real regulatory control.
Justin King will not be in a position to receommend the deal to the shareholders as that will be the job of the non-executives so your final point is a little flippant.
Also, even if, let's say, Tesco bought Sainsbury they would never pay cash from their own account. Every deal of this magnitude will require an element of debt. The matter is a question of how much. No-one seems to be batting an eye lid about the large amounts of debt being taken on by parts of the RBS consortium?
Still, it is bold on Qataris behalf. Market is nervous and debt crisis is looming large. I am sure Sainsbury find itself luck by getting away with loads of money and shedding away loads of debt.
It seems to me that Delta Two's bid for Sainsbury's offers an attractive opportunity for making an attractive short-term gain.
Shares in Sainsbury's are currently priced at £5.55 to buy. Adding on 0.5% for stamp duty takes the buying price to £5.58.
Thus, Delta Two's offer of £6 per share represents a return of 7.57% for taking the risk that the bidder will withdraw its offer, or that the OFT will derail the deal.
I see this as a genuine arbitrage opportunity -- a way to make a good gain in a short period of time. The next few days will prove me right or wrong!
Once again we seem to be forgetting the J Sainsbury colleagues within the retail and Distribution side of this Company, who, over the last three years have worked very hard in making "Sainsbury's great again".
At this moment in time Sainsbury's are giving both Asda and Tesco a run for their money, its ok talking about short term gains in monetary terms but what about long term gains in job security, for me its unthinkable for a foreign investment Company like Delta 2 to just come in and pull the rug from under these dedicated Colleagues and maybe fragment another great British institution
Surely this is just a way of separating out the real estate from the business. Isn't this where the Arabs hope to make money? - by sale and lease-back of the shops. That together with the debt the company will be burdened with should see Sainsbury's bust in around 2 - 3 years.
This is not the end of this takeover story. Sainsburys has been "in play" for some time now. With the size and value of Freehold properties there will be others watching closely for the board to move. Once they give approval to the highly debt leveraged Delta 2 bid it confirms that the family is finally prepared to let go and then the supermarkets group is really "on the market" and open to all credible offers. I think we will then see the counter offers coming in and Sainsbury finishing up at a final take out price nearer 680p.