大象传媒

Sainsbury's new deal

• Robert Peston
• 11 Sep 07, 01:30 PM

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 拢10.4bn for the lot. The enterprise value for the bought-out business, to include its existing debt of 拢1.6bn, would be 拢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 拢3.1bn to about 拢3.8bn. The pref element will be unchanged at 拢500m and there will be a reduction in payment in kind notes from 拢1bn to around 拢700m.

The net effect will be to increase the equity element of the deal from 拢4.6bn to circa 拢5bn - and there will be a reduction in the prospective indebtedness of the bought-out Sainsbury from 拢7.4bn to 拢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, 拢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 拢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 拢7bn of debt.

However he'll be 拢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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