Geoff Cutmore - Morning Thoughts

Private Equity struggles to check out Sainsbury

Has private equity met its match? Does the slow-motion unraveling of the CVC bid for the U.K. supermarket group tell us anything about the cycle?

If so equity investors need to take note. If the crutch of M&A is removed from this market, investment strategies will need to change.

All deals have their own logic, but there are some interesting lessons to be drawn from the battle for Sainsbury. CVC has been left to steer its offer home after fellow groups Blackstone and Texas Pacific quit the bidding consortium. Despite winning over the board, which seem to have been willing to work with a 582p price per share, the Sainsbury family which is thought to have about 18% of the company has made it clear that nothing will happen below 600p.

Newswire sources indicated family members have been sellers at 400p a share and below, which suggests this is not about resistance to a deal at any price. The family and its advisors seem to believe there will be a better bid. Robert Tchenguiz who has also built a stake around 560p must also believe there is a higher bid still to come. The market doesn’t seem convinced and has been a seller today.

Whatever the ultimate outcome, and I make no predictions, the pursuit of Sainsbury has been instructive.

1.         Private equity group bidding consortium can be fragile creations. Clearly this CVC led operation offered one price, but the partners have different views about the final price.

2.         Sainsbury is a large player among a small group that dominate their industry. This dynamic means there are unlikely to be any rivals that can bid with the agreement of competition regulators. Therefore shareholders can expect little support for the share price from trade buyers.

3.         The family’s position on the price and the Scheme of Arrangement mean CVC would have to clear an unusually high bar -- of 75% acceptance -- to complete the deal. Could the group have misunderstood the family’s intentions before getting involved? Or underestimated the challenge?

4.         Investors will see this deal challenge the image of infallibility that the PE industry has attracted. The reality has been of plenty of talk, but few major deals being done in Europe.

The Sainsbury board has to decide whether to open the books to CVC -- but to do so without certain prospect of the deal being completed would be rash. For private equity this is one deal that is far from in the bag. 

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