Peston's Picks

Sainsbury: Takeover in sight?

• Robert Peston
• 2 Feb 07, 01:31 PM

A Sainsbury’s director said to me a year ago, “you watch, when it’s clear that we have turned the business around, private equity will come in with a bid”. And so it’s proved – well almost, in that what we have this morning is that most modern of City announcements, viz “an announcement of a hypothetical possibility of a takeover offer subject to enough conditions and caveats as to make the statement less valuable than the electronics used to beam it to the market.”

Sainsbury is a business well into its recovery phase. And lo, this morning there’s a statement from a consortium of three private equity houses saying they are “at the preliminary stages of assessing Sainsbury”. Which slightly gives the lie to the widely held view that private equity investors take more risk than public company investors. The truth is subtler: Private equity is more comfortable with certain kinds of risk than public-company investors. What private equity is prepared to take is increased financial risk: It is prepared to massively increase the indebtedness of a business in order to up the returns.

But private equity does not much like to combine this financial risk with operational risk – and it’s therefore a comfort to it that Sainsbury under Justin King has demonstrated that Sainsbury can grow again, even if that means any takeover would be at a higher price.

However the timing of this not-quite bid approach is also linked to Lord Sainsbury’s resignation from Government last autumn. He signalled at the time that he wanted to devote his time and wealth to charitable undertakings, which implied that his substantial shareholding in the company would be available for purchase. And as if to confirm that, yesterday it was disclosed that 40 million of his shares had been sold, leaving him with a holding of just under 14%.

The troika of potential, putative, possible bidders is led by CVC Capital Partners, the UK’s number two private equity house. And it also contains Kohlberg Kravis Roberts – the world’s biggest private equity business – and Blackstone, which also ain’t no minnow. The three of them certainly have the firepower for such an undertaking. And they’re being advised by Lazard Bros and Goldman, two leading investment banks.

However, it’s relatively early days. The consortium was formed earlier this week. They appointed a public relations adviser only yesterday. And they have had no formal contact or meetings with Sainsbury’s management or board.

So will this become a proper bid? Well, the consortium didn’t have to make its announcement today. What happened was that the Times published a story about a possible private equity bid for Sainsbury this morning. Sainsbury’s share price raced ahead. And the Takeover Panel told the consortium it had two choices: either disclose that a bid was possible; or close down the option of bidding. The troika decided to make a statement and press on.

That is the evidence that they are serious. On the other side, Sainsbury’s share price has raced ahead today by more than 15% to well over 500p (513.75p at the time of writing). And so the Private Equity Three will be concerned that the business has become just a bit too pricey.

My prediction is that they will come up with an indicative price for a takeover offer that’s high enough for Sainsbury’s board to at least have preliminary negotiations on a deal. Apart from anything else, they may be the only possible bidders, so this may be a once-and-forever opportunity. The reason is that the competition authorities wouldn’t allow another supermarket group to own Sainsbury. And it’ll be hard – though not quite impossible – for a rival private equity consortium to be formed to make a rival offer.

If there is value in Sainsbury, where would it be? Well this story is largely about Sainsbury’s property, the value of its stores as physical assets rather than as trading shops. The broking firm, Numis, recently estimated that its freeholds are worth about £7.5bn, which compares with the current market value of the business as a whole of £8.8bn.

A year ago, Sainsbury realised some of the value in its properties by borrowing just over £2bn against the security of 127 stores. A private equity owner would do a great deal more of that kind of thing, to extract cash from those assets.

So for Sainsbury’s existing shareholders, this is what a decision on whether to sell out will come down to: do they want to lock in the current higher Sainsbury share price (or a bit more) by selling out to private equity; or would they stick with Sainsbury’s management and encourage them to take more financial risk, extract increased returns from the property, and pass that back to shareholders in the form of special dividends or share buybacks?

It’s quite a big moment in the history of the relationship between private equity and the owners of publicly listed companies like Sainsbury. It’s significant that CVC is in the lead for the troika. It was part of the duo (with Texas Pacific) which is widely perceived to have bought Debenhams too cheaply from the stock market and sold it back to the market too expensively. Shareholders won’t want to make the same mistake again with Sainsbury.

UPDATE 15:32 GMT: Would the private equity troika want to keep Justin King in place to run Sainsbury if they succeeded in acquiring the business? On the basis of my soundings, I think they would. Which, of course, puts him in a tricky position - if he were to run Sainsbury after a buyout he would have the opportunity to become wealthy well beyond what he can accumulate running a listed business. If he is on course to earn a few millions in his current role, private equity could offer him many times that.

On that basis, he plainly couldn’t be involved at all in adjudicating whether the private equity troika were offering shareholders enough to buy the company. He would have to stand well to one side as the Sainsbury non-executives decided whether any bid terms were generous enough.

• Permalink
• Comments

PM in all but name

• Robert Peston
• 2 Feb 07, 12:43 PM

As author of a book about Gordon Brown, I have a nerdish knowledge of his relationship with the prime minister. And – except on one occasion in 2004 (when the PM wanted to announce an intention to resign at a later date) – the notion that the chancellor would ever deter Tony Blair from quitting is fanciful. However Gordon Brown would be nuts to want to enter 10 Downing Street just now.

Imagine becoming prime minister at the moment that the police investigation into the alleged sale of peerages was reaching some kind of climax. The thunder emanating from that black cloud is so loud that it would drown out any attempt by Brown to relaunch himself and rebrand the government.

Apart from anything else, the power of being head of the government seems to have largely shifted to him, even in the absence of the formal title: For John Reid to disclose that he discussed the problems at the Home Office with his supposed nemesis, as he did earlier this week, is a striking confirmation that Brown is PM in all but name.

In fact, given the troubled history of his relationship with Blair, what would be making Brown especially anxious right now is the thought that Blair could quit at the precise moment when it would be worst for Brown – which would be within days or weeks, rather than on the expected timetable of June or so.

That said, in his gripping interview with John Humphrys this morning, the prime minister more-or-less said he wouldn’t do that. But Blair conducted the interview as though it was a valediction. And for what it’s worth, Blair’s friends – as opposed to his “friends” – tell me they wish he’d stepped down already, for his own sake.

• Permalink
• Comments

Investigating BAE systems

• Robert Peston
• 2 Feb 07, 12:01 PM

Our man in Riyadh was one of two decisive influences on Robert Wardle, the director of the Serious Fraud Office, when he decided not to continue the SFO’s investigation into alleged bribes paid to Saudis by BAE Systems. That’s what Wardle told me yesterday.

Wardle spoke to Britain’s ambassador to Saudi Arabia, Sir Sherard Cowper-Coles, on three separate occasions over two or three weeks before the announcement on 14 December last year that the SFO was discontinuing its probe into commissions paid by BAE as part of the Al-Yamamah defence contract. From these conversations, Wardle was persuaded that the investigation was putting an intolerable strain on diplomatic relations between the UK and Saudi, which could threaten our national security.

It was a delicate moment in the investigation. At the time (and subsequently) the SFO believed it was close to having built a case that could be prosecuted - although the Attorney has consistently maintained that the prospects for a successful prosecution were slim to none. Indeed, thought was being given to approaching BAE with the offer of a plea-bargain.

However, after two of his conversations with Cowper-Coles, Wardle had to contend with representations from an altogether more powerful individual, the head of the British government. Wardle received a substantial dossier, compiled by 10 Downing Street in the name of the prime minister, again highlighting the supposedly dreadful damage being done to the nation by the SFO’s Saudi enquiries.

The views of Tony Blair had been obtained by the Attorney General, Lord Goldsmith, as part of what’s known as the 1951 Shawcross Convention, which is a process of obtaining ministerial views on whether a particularly sensitive prosecution could damage the public interest. This is how the then Attorney-General, Sir Hartley Shawcross, described this exercise more than half a century ago:

“The true doctrine is that it is the duty of an Attorney-General, in deciding whether or not to authorise the prosecution, to acquaint himself with all the relevant facts, including, for instance, the effect which the prosecution... would have upon public morale and order, and with any other consideration affecting public policy. In order so to inform himself, he may... consult with any of his colleagues in the Government and indeed... he would in some cases be a fool if he did not... The responsibility for the eventual decision rests with the Attorney-General, and he is not to be put, and is not put, under pressure by his colleagues in the matter.”

What’s curious about the BAE case is that Shawcross Convention was employed - or so the Solicitor-General, Mike O’Brien, has told the Commons - but the decision not to proceed with the case was not taken by the Attorney, as it would normally be under the Convention. Downing Street, the Attorney and Wardle himself all say that it was Wardle who made the big call and stopped the probe.

So put yourself in Wardle’s position. He was being told by the prime minister, no less, that an investigation was threatening the very security of the nation. What was Wardle supposed to do? To be clear, Wardle is not complaining about the burden of having to weigh the duties of his office to pursue possible serious crime against a wider public interest. His view is that it comes with the territory. But, in practice, how easy would it really have been to ignore the urgings of the prime minister?

• Permalink
• Comments

The face of Britain's banks

• Robert Peston
• 2 Feb 07, 11:09 AM

For sheer entertainment, listen to Angela Knight, newish head of the British Bankers’ Association, defending the banks’ record on lending to individuals who subsequently run into financial difficulties on this morning’s Today programme. She is the new face and voice of Britain’s banks. And gone, at a stroke, is the dull grey caution and equivocation of the typical banker or banking spokesperson.

I chatted with her the other day and was impressed by her willingness to engage in proper debate about what the banks do well, and what they don’t do so well.

But what’s particularly refreshing is the absence of anything namby-pamby about her. This morning she described a recent report by U-Switch, the online service that advises on best consumer deals on assorted services, as “yet another load of rubbish out of U-Switch”. And then she chuckled. Sorry Angela, do you think you could tell us what you really think?

• Permalink
• Comments