Trustees decide Sainsbury’s fate
Press and City – myself included – have been obsessing with when the stalking will tell the supermarket’s board the price it is prepared to pay to buy the business, so that proper negotiations may begin.
But we may have been looking in the wrong place for the talks that will determine the future of this celebrated retailing name. The dialogue that matters – which I think is going on right now – is between the four deep-pocketed giants of private equity and the trustees of Sainsbury’s pension fund.
In something of a re-run of the big event in Philip Green’s abortive attempt to buy Marks and Spencer, the bidding quadruped needs to know how much cash it will be obliged to put into Sainsbury’s pension fund. Only when that liability is clear can it decide how much it can afford to pay for the retailer.
The deficit in Sainsbury’s pension fund of £276m as of October 7 2006 may not look much by comparison with the billions at the disposals of such well-heeled private equity funds as , and TPG. And it doesn’t look huge in comparison with Sainsbury’s stock market value of £9.4bn.
But the pension-fund liability could in fact determine whether the quartet can offer Sainsbury’s board and its shareholders enough to carry off the prey.
Here’s why.
First, Sainsbury – as currently constituted – has agreed to pay off the fund deficit over eight years.
Second, Sainsbury – as owned by private equity – would have billions of pounds of property assets stripped out of it and billions of pounds of debt loaded on to it. So it would become a riskier business with less deep pockets.
Third, the pension fund trustees would want the net fund liability paid off quicker than over eight years if Sainsbury became a more fragile business under new ownership.
Fourth, the trustees may also feel that the increase in the riskiness of the parent company requires a decrease in risk at the fund itself. So it may decide it would have to cut its current holdings of equities from the current 62% of assets and increase its holdings of bonds. Such a switch from equities to bonds would probably have the paradoxical effect of increasing net scheme liabilities to a figure in excess of £276m.
So the fund trustees may insist on a one-off, immediate cash injection from the putative bidders of several hundred million pounds. And that could make all the difference between whether the private-equity four can offer 540p per share, which is a price the Sainsbury board would probably turn down, and 570p per share, a price the Sainsbury directors would feel under pressure to take.
Or to put it another way, the fate of J Sainsbury may be settled by its shy, anonymous pension-fund trustees.
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What saddens me is that the nature of Sainsbury's business as a major retail store is of no consideration at all in the determination of its future. its is seen as merely an asset with the encumberance of a pension fund attached.
Who are the shadows behind this move? Who are the real people shaping the future? Does anyone know?
Reading the Economist recently I was led to believe that private equity simply took underperforming businesses and through the application of proper business principles, improved matters. The Sainsbury's situation would imply that private equity is simply on a hunt for any business that has assets to sell and that has cashflow to fund the debt dumped on it. It seems private equity gets rich on the successful efforts of previous managers who grew the value of a business. In return private equity fires people (it seems they always do) and returns a debt ridden company to the stock market and sells it on the back of questionable profit figures. Sainsbury's was once top dog, and in the best tradition of capitalism, is in a cycle, had gone to the bottom and is working it's way back up. But obviously not quickly enough for those with short attention spans.
Final question...if the private equity funds never actually created any of the wealth of assets available for sale - why do they get the big pay off when the staff and customers get so little?
So Sainsbury's may be bought out. No surprise, could it be the US or, for a change, China. I'd go with China if I were Sainsbury's and unable to hang on. By the way, is there any one person out there who can tell me the true ownership of HSBC Bank given that pre the Iraq war they were operating the Patriot act in Canada. Do please tell I don't like these big inc, conandglobbymoreprofit secrets!
Isn't is about time WE, the actual consumers i.e. those who have to put up with these takeovers/messing us about etc, stood up and said NO THANK YOU - since the current managers have taken over our local shop is really good - so what would this new lot do to improve things? Nothing I suspect - probably make things worse.
So my vote a shopper is - shove off and leave my shop alone. Remember there is a Tesco and Waitrose nearby!!
The Sainsbury board should reject any private equity bid. The PE firms are not interested in the long term stability of the business, purely the opportunities to maximise their ROI. In and out as fast as they can.
Very interesting story, and probably a more common occurence than you might think. In addition to M&S, the pension fund deficit also became an issue in the proposed Permira buyout of WH Smiths. Those who think that trustee boards work with a simple employer vs employee dynamic think again. I bet neither group is comfortable with being taken private so both will probably ask for as much as possible upfront. And they can use the Pensions Regulator as back up for their position.
Maybe final salary schemes will come back into fashion when companies realise they can use underfunded schemes as a poison pill...!
I have worked for Sainsbury's for 12 years. We have seen the rise of Tesco's and have struggled with the company as they blindly sought to find a solution to 'make us great again'. I will be heartbroken if all Sainsbury's Supermarkets Ltd means to the Family and the Board is money in a pension fund and assets...why,oh why, have we struggled for so long if the only reason we are here living for this company, this institution, is to be catapulted into more uncertainty and speculation.
Why can't we be left to succeed, to be proud of our company again?
I currently work for a company that was recently taken over by "one of the four" trying to get their hands on Sainsbury’s. I have to be careful about what I say, so hear goes. My personal experience since this happened is not good. I have seen many long serving, highly experienced people disposed of. I feel moral has fallen sharply and I would not be happy giving my hard earned money to Sainsbury’s if they are indeed taken over by what I personally consider to be the true "Axis of Evil". What better way to destroy western civilisation that to use our own greed and desire for short term profit to destroy viable businesses, throw millions of people onto the dole queue and bankrupt the state.
PE are simply trading on the arbitrage difference between the publicly traded stock and its vale under private hands. Under the glare of the public domain where there are requirements to meet quarterly targets and over regulation the share price is undervalued. Add to this the increase in money supply which has led to asset prices to rise substantially. A prime PE target is one which has a) regular cash flows, b) a large asset base. As long as there are no tax incentives to build up large asset bases and that 100% relief on interest payments PE companies will continue to flourish.
The only solution is if you are a target is to either go Private or sell your assets.