A bid for Sainsbury? If not now, maybe later

A bid for J Sainsbury Plc may not be imminent, but its property assets, growth plans and uncertainty over the intentions of its top investor could keep it a focus of speculation, and its stock in demand.

Shares in Britain's third-biggest supermarket group leapt as much as 20 percent on Thursday as chatter swirled that its largest investor, Qatar's sovereign wealth fund, was mounting a new takeover bid after a previous attempt failed in 2007.

The stock slipped back as it became clear that neither Sainsbury nor its founding family, which owns about 15 percent of the business and was opposed to the takeover in 2007, had received a proposal.

But the shares still held onto almost half their gains and, having underperformed the DJ Stoxx European Retail Index .SXRP by 13 percent this year, seems likely to remain supported by the possibility of an offer.

Many analysts are skeptical the Qatar Investment Authority (QIA) will have another go.

The leverage potential has reduced significantly, property yields have fallen sharply, Sainsbury has disposed of a further 500 million pounds of ancillary assets, and pension trustees would be even more hard nosed, said Jefferies' James Grzinic.

Analysts also think the price tag that accompanied the Qatari rumors -- 420 pence a share, or 7.7 billion pounds ($12.5 billion) -- is too low.

Times have changed since the Qataris' last abortive proposal of 600 pence a share, but analysts at Bank of America-Merrill Lynch analysts reckon a bid would have to be in excess of 500 pence a share to win management backing.

Even that may not be enough for shareholders who have weathered the storm of the economic downturn and are now looking to reap the benefits of a steady recovery in consumer spending and Sainsbury's ambitious expansion plans.

There are grounds, however, for thinking the QIA might be tempted into a bid at a higher price.

PROPERTY ASSETS

One is Sainsbury's rich real estate portfolio, which Jefferies estimates is worth 7.5 billion pounds, or 0.95 times the group's enterprise value, compared with 0.79 times for Tesco, Britain's biggest supermarket group.

Superstore property yields appear to have steadied around the 6 percent mark, and while they may not return to the boom levels of about 4.5 percent, some think it might be a good time to buy in anticipation of a recovery.

Pali International analyst Nick Bubb said assuming property yields of around 5.5 percent would give a sum-of-the-parts valuation for Sainsbury of about 420 pence. Add a bid premium, and a suitor could get close to 500 pence.

Some also have high hopes for Sainsbury's growth plans.

In June, the group raised 432 million pounds to help expand selling space by 15 percent over the next two years, up from a previous target of 10 percent, with a focus on growing non-food ranges and extending its footprint in convenience stores.

Societe Generale analysts think taking advantage of cheap prices to buy more freehold property could help Sainsbury narrow the gap between its profit margins those of rivals such as Tesco, as it has been held back by a higher level of rent costs.

Having defied fears it would be squeezed in the recession by its mid-market position, a bidder may be attracted by the hope Chief Executive Justin King will continue to deliver.

PICK UP IN M&A

The main uncertainty in all of this, is the intention of the QIA, which has steadfastly refused to comment since it took control of a 26-percent stake in Sainsbury shortly after a related Qatari fund dropped its bid proposal in the teeth of the credit crunch.

The QIA, which invests the surpluses from the Gulf state's huge gas resources, has struck several deals in recent months.

Banking sources point out that many, like its investments in carmaker Porsche and property firm Songbird Estates, are stakes rather than takeover bids.

But as M&A markets open up, this might change.

This is the time when those who have the cash are going to buy the assets, said S&P Equity Research analyst James Munro.

During Thursday's frenzied rumor-mongering, there was even talk a third party might buy the QIA's stake and launch a bid.

In early 2007, prior to the QIA's takeover attempt, a private-equity consortium led by CVC made a bid approach.

Given the size of the deal and lack of finance for leveraged buyouts, it seems unlikely private equity will have another go. Trade buyers like Tesco, Asda and Morrison would also face huge anti-trust barriers.

An alternative scenario, periodically mooted by analysts, is a tie-up between Sainsbury and Marks & Spencer.

With M&S battling to turn around its food business, and Sainsbury looking to expand in non-food and convenience stores, where M&S already has a presence, there is logic to a deal.

While neither company appears enthusiastic, it could also neatly resolve the uncertainty over management succession at M&S at a time when CEO Justin King seems keen to stay at Sainsbury.

(Additional reporting by Victoria Howley, editing by Will Waterman)

($1=.6157 Pound)