Sainsbury's takes nosedive as Delta Two negotiations collapse

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The Independent Online

Investors have lopped £2bn off the value of J Sainsbury after the supermarket giant announced that its six-month flirtation with Delta Two, the Qatar-owned investment fund, had ended.

Paul Taylor, head of Delta Two, blamed his decision to pull the proposed £10.6bn offer on the downturn in the credit markets and a significant increase in the equity cheque the firm would have had to write in order to secure backing from the company’s board and pension trustees. Investors punished the company’s stock, sending its shares down 20.7 per cent to 440p.

It is understood that Delta Two, which is owned by the Qatar Investment Authority (QIA), plans to hold on to the 25 per cent stake it built up through the process. The property tycoon Robert Tchenguiz will likewise hold on to his 10 per cent stake. Combined with the 18 per cent holding of the Sainsbury family, the company is left with an awkward shareholder register that makes it essentially bid-proof – its impending takeover was the main reason behind its buoyant stock price.

Freddie George, the retail analyst at Evolution Securities, slashed his price forecast for Sainsbury’s from 540p to 460p on the news. He said: “This process must have been time-consuming and very demotivating for the management¿ and could, in our view, impact trading in the short term.”

Under Delta Two’s initial proposal in July, the firm agreed to write an equity cheque of £3.1bn, with the remainder of the £10.6bn headline price in various forms of debt. The Sainsbury family and the board lobbied for a greater equity chunk. In September Delta Two acquiesced, tabling a revised bid with an increased £4.5bn equity element. After conducting due diligence, the firm announced last month that it would need another £500m in equity to inject into the pension scheme and for working capital needs.

That would have pushed the overall cash that would have to come out of the QIA’s pocket to £5bn, accounting for more than one-sixth of its estimated $60bn (£29bn) pot of capital. Mr Taylor said: “Having given careful consideration to the additional funding requirement and its impact on prospective investment returns, Delta Two has regretfully concluded that a recommendation to proceed would not be in the best interests of stakeholders.”

Some investors had begun selling out of the stock last week amid the uncertainty created by Delta Two’s revelation that it needed more cash. The hedge fund Citadel increased its exposure last week however, buying 1 million shares in the 540p range to push its position to 1.27 per cent. After yesterday’s stock price fall, it was sitting on a loss of £40m, according to market sources.

The falling dollar is also understood to have been a factor. Qatar uses excess cash from the sale of natural gas, which is priced in dollars, to pay for its acquisitions abroad. Since Delta Two first started buying shares in the group six months ago, the dollar has dropped nearly 5 per cent against the pound. Combined with the massive equity cheque the deal would have required and the increased cost of debt financing due to the deterioration of the credit markets, the deal became economically unattractive.