Investors sell as Sainsbury's bid hopes fade

Worries that Delta Two will be forced to call off its £10.6bn pursuit of J Sainsbury increased yesterday after a top-10 investor in the supermarket giant sold down its stake for much less than the £6 per share tabled by the Qatar-backed investment firm.

The move by the hedge fund Lansdowne Partners to sell 12 million shares, a third of its holding, for about £65m will stoke speculation that the Qataris will not be able to secure the necessary financing amid the credit market meltdown. Lansdowne said the move was a simple portfolio de-risking exercise. But its decision to bail out before the takeover outcome is clear will add to the simmering belief in the market that the crisis in the debt markets makes Delta's plans to raise £7.5bn in debt virtually impossible.

According to Dealogic, 67 transactions worth more than $24bn (£12bn) have been called off in the past five weeks as the debt markets--shaken by the implosion in the US sub-prime mortgage market--have ground nearly to a halt. Lansdowne sold the shares in several tranches on Tuesday at prices between 526p and 531p per share, well below the £6 that Delta Two proposed. Traders speculated the buyer could have been Delta Two itself, which already owns about 25.1 per cent of the company. By the close of the market, however, Delta Two had not disclosed a share purchase.

It has been five weeks since Delta Two first made its proposal. Talks between the two sides are ongoing, but there are signs that the negotiations could be stalling. A meeting that was set to be held last week between Paul Taylor, head of Delta Two, and the Sainsbury chairman, Sir Philip Hampton, was called off because there had not been sufficient progress on the key sticking points in the negotiations, according to sources close to the situation.

Specifically, the Sainsbury family as well as the board are understood to want Delta Two to inject more cash into is bid as well as to give assurances that the debt used to finance the deal would not require large repayments that would constrain its ability to compete against rivals like Tesco.

Under the original terms of Delta Two's £10.6bn offer, £3.1bn would be in cash, £1.5bn would come in the form of PIK notes - a proxy for cash that became popular during the recent buyout boom - and the remaining £6bn would be debt. "Those PIK notes are just not going to happen. They can forget about those now," said an analyst.