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Sainsbury’s shares trading up 14% on rumours of bid from hungry Apollo

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Following Asda’s takeover last year, and CD&R’s successful £7 billion offer to acquire Morrisons after a series of speculation and bidding for the company, attention has turned to Sainsbury’s.

Sainsbury’s shares leapt over 12% to the top of the FTSE 100 Monday after reports it is a target of Apollo, which missed out on the takeover of Asda last year.

SBRY shares have already risen 40% this year amid heavy speculation it would be the next in the private equity firing line. “Sainsbury’s is undeniably a good target for private equity with a considerable store estate, with the company having more than $10bn in property assets – more than its current market cap by decent margin,” observed Neil Wilson, Chief Market Analyst at Markets.com.


Sainsbury’s net debt is down, profits on the up

The Argos tie-up is another long-term growth lever and provides further scale, while profits are on the up again in the wake of the pandemic, and net debt has come down.

“It’s hard to beat those reliable cash flows – even without a big sale & leaseback plan the supermarkets are generating the kind of yield that is hard to get elsewhere,” added Wilson.

The UK has seen an unprecedented surge in takeovers of UK companies in the private sector following Covid-19 and Brexit with Refinitiv finding that in 2021, buyouts of UK companies of British companies increased by 98% in comparison to 2019. As such, this speculation surrounding Sainsbury’s is unsurprising and seems set to see this trend continue in UK markets.

UK supermarket sector is highly competitive

The UK supermarket industry is one of the most competitive in the world yet there has been speculation about bids for Morrisons and Sainsbury’s for years.

Similarly to Morrisons, Sainsbury’s is very attractive to private equity investors because of its property portfolio. Sainsbury’s also has two other advantages, a very loyal customer base and a strong digital strategy. The group has self-checkout and was an early adopter of customer self-scanning. Usage of the Sainsbury’s app has seen an enormous spike during Covid and the customer stickiness it is driving is remarkable.

“Timing is also a factor,” said Ross Hindle, an analyst at Third Bridge. “After 18 months of disruption, every big grocer has capacity expansion plans, especially for their digital businesses. These have accelerated so much that some colossal choices need to be made about how shopping is going to evolve over the next decade. Sainsbury’s somehow needs to make the right call on whether innovations like instant grocery delivery are really going to take root and potentially build further infrastructure.”

Industry experts are telling Third Bridge a deal could be very good for Sainsbury’s. The supermarket began a ‘something more’ strategy with its acquisition of Argos. Refreshed ownership could provide the momentum to accelerate the Sainsbury’s and Argos integration, which provides lots of options from a property and teams perspective.

Sainsbiry’s shares were up 14.96% at time of writing, at 339.24p. Meanwhile MRW shares trade steady at 291p, around 6p above the latest CD&R offer as investors bet there is more to come in that particular bidding war.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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