Tesco And Sainsbury’s Must Fight For Their Future
It might be next month, or it might be the month afterwards – but there can no longer be any question that Morrisons will soon be sold off to one of a surprisingly long queue of bidders.
There is already speculation swirling around Sainsbury’s. And even the mighty Tesco, once the biggest beast in the British retail jungle, can no longer be regarded as safe from a takeover. The entire grocery industry is in play in a way that it hasn’t been for many years.
NAM Implications:
- All mults appeal because of a combination of strong demand and cash flow, negative working capital (sell for cash, pay suppliers in 40 days), largely self-owned estates for sale & leaseback.
- Private equity come in with a 5-year agenda for re-floatation.
- Focus on financial output and cut anything that moves.
- NAMs best conduct what-ifs for all mults on these lines…
- …and formulate appropriate strategies.
- Fast!
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It might be next month, or it might be the month afterwards – but there can no longer be any question that Morrisons will soon be sold off to one of a surprisingly long queue of bidders.
There is already speculation swirling around Sainsbury’s. And even the mighty Tesco, once the biggest beast in the British retail jungle, can no longer be regarded as safe from a takeover. The entire grocery industry is in play in a way that it hasn’t been for many years.
But hold on. Where’s the fightback from Sainsbury’s and Tesco? Plans for fresh growth? Share buybacks or higher dividends? Acquisitions in other countries, or along the supply chain to bulk up their size and shore up their defences?
In truth, there is not much sign of life from either company. If that doesn’t change, and change soon, and if they don’t start showing some spirit and resolve, they will be easy targets for whoever wants to take them out.
The market still thinks there is some drama left in the battle for control of Morrisons. The chain has agreed to a £7bn offer from the buy-out firm Clayton, Dubilier & Rice, but the share price is still hovering slightly above the level agreed. The rival offer from Fortress, another private equity house, might well be increased. Another bid, perhaps even from Amazon, may yet be launched.
Morrisons has agreed to a £7bn takeover offer from CD&R
One thing is surely clear, however. One way or another, the chain will be sold. And perhaps more intriguingly, there will be a group of buyers who were keen on buying into the British grocery market who will be left both disappointed, and with a few billion burning a hole in their pockets.
The reports in one Sunday newspaper that a third buy-out firm, Apollo, was lining up an offer for Sainsbury’s look, to put it mildly, to have been a little over-enthusiastic. There is no sign of a bid emerging any time soon. And yet, there is no question there is plenty of interest in the British grocery market.
Asda has already been sold to the Issa brothers, along with TDR Capital. Amazon is waiting in the wings, waiting to pounce on Morrisons or someone else. Other foreign chains – France’s Carrefour, for example, or one of the fast-growing Chinese or Taiwanese chains such as WuMart – may well be interested.
Low valuations, an economy that is recovering rapidly from both Covid-19 and our departure from the EU, and the potential for cost savings and asset sales, make British food retailing an attractive mix.
Neither of the two remaining chains should imagine for a moment that they are safe. Sainsbury’s is only valued at £7.4bn, and that is after takeover speculation sent its shares to a seven-year high. It is only a fraction more than CDR is paying for Morrisons, even though everyone would surely agree it is a far better brand, with a lot more appeal to prosperous shoppers in Southern England.
Sainsbury's share price jumped on takeover talk
Even at £20bn, Tesco is not too big for a buy-out offer. Germany’s Thyssennkrupp sold its elevator unit to a group of private equity firms for $19bn late last year. A £25bn offer for a business with the stable cashflows Tesco can offer would hardly raise any eyebrows in the buyout industry.
Here is the important question, however. Why hasn’t the defence already started? It is not as if either company has shown much in the way of imagination over the last five years.
Both chains have allowed Ocado to attack them from one end of the market and Aldi and Lidl from another, while Asda is already showing a lot more ambition than either of its bigger rivals with its acquisition of the Leon chain. Even worse, they will soon have a revitalised Morrisons to deal with as well.
Tesco's shares are also climbing
They both need to start fighting back. Like how?
First, and most importantly, they need to show that they can grow again. It might be expanding into the booming market in artisan foods, or ten-minute delivery, or prepared food boxes. Or something else completely. But they need to prove they are doing something new.
Second, they should blend more technology into the business. Whether it is vertical farms, drone deliveries, lab-grown meats or AI-driven, cashierless shops, the more technology-driven the story gets, the higher the share price will go.
And third, they need to exploit their balance sheets with more debt to fund buy-backs and dividends because that is always the surest way to keep shareholders happy.
Finally, start making some acquisitions of their own. Coffee and casual dining chains are cheap in the wake of the pandemic. Many emerging markets are still wide open to chains from the developed world. And our departure from the EU opens up huge new opportunities to source food from different countries, and potentially own the entire supply chain.
There are plenty of possibilities. The point is to seize them.
The Sainsbury’s share price is no higher than it was five years ago, and Tesco is still down on its peak of 600p way back in 2007. In the wake of the sale of Morrisons, plenty of potential buyers are going to be looking at other supermarkets very closely.
If Sainsbury’s and Tesco want to keep their independence they need to start fighting for it now. Once a bid arrives, it is already too late – and they will deserve to lose if they haven’t prepared in advance.
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