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Sainsbury’s experiment

• Robert Peston
• 16 May 07, 08:45 AM

is the one that got away.

A quartet of private equity giants tried to buy the supermarket group a . But they failed - largely because some of Sainsbury’s founding family thought the offer was too low.

But at almost exactly the same time, another retailer, , was bought by KKR, the great veteran of private equity. And, as I’ve mentioned before, although Boots is in healthcare and Sainsbury is largely in food, they have a good deal in common.

They're both worth about £10bn, give or take a billion or so.

They both face intense competition from and - though obviously in different parts of their respective businesses.

They've both been recovering after years of decline.

They're both run by executives trained by Mars - that's Justin King at Sainsbury and Richard Baker at Boots.

And they both have strong brand names and powerful market positions.

So there will be a chance to see over the next two or three years whether big businesses do better when owned like Sainsbury, in a conventional way - as a stock-market listed business - or whether its better to flee the stock market and be owned by private-equity.

As it happens, this morning Sainsbury has in effect stuck two fingers up at private equity – and at Robbie Tchenguiz, the property tycoon who owns 5 per cent of Sainsbury and wants it to demerge all its property into a separate, tax-efficient company, called a REIT.

Sainsbury has announced that the value of its properties is £8.6bn. But rather than do what a private equity owner would do, which would be to sell or mortgage most of that, it will hang on to those assets.

Why? Because it believes - like Tesco - that the value of those properties can only rise if its stores perform better.

So it's setting itself new three year targets for sales growth and for investment. And it's doing the complete opposite of Boots, in that it's not loading itself up with billions of pounds of new borrowings.

What that means is that it should have more resources to invest in the business.

So what will Boots have that Sainsbury doesn't?

Well, Boots won't have the bother and expense of keeping the City informed of its every sniffle and sneeze. And it'll provide infinitely more generous financial incentives to its top managers.

It'll be gripping to see whether Boots or Sainsbury eventually emerges as the stronger - not least because tens of thousands of employees depend on each of them.

Right now, Sainsbury seems to be moving out of its recovery phase and may actually be adding proper new sales for the first time in years. But what if it slips up?

Well Delta (Two), an investor which manages money from the gulf state of Qatar, recently became Sainsbury's biggest shareholder with a 17.6 per cent stake. And if Qatari interests wanted to own the whole thing, they have more than enough cash.

The modern rule for any company with decent assets and a good brand name, like Sainsbury, is that if private equity doesn't buy it, there's still a chance of a takeover bid from a Russian oligarch or an oil rich gulf state.

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