Sainsbury's talks stall over pension injection

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The Independent Online

The proposed £10.6bn takeover of J Sainsbury by a Qatari investment company was stalled on a knife-edge last night as negotiations continued about the size of a planned cash injection into the supermarket group's pension fund.

Delta Two, the fund backed by the government of the emirate, is understood to have offered to pour a substantial sum into the retailer's pension scheme. However, it is thought to fall between £500m and £1bn short of the £2bn that the trustees of the company's 85,000-member pension fund are asking for.

The Sainsbury family, led by Lord Sainsbury of Turville and Lord Sainsbury of Preston Candover, has thrown its weight behind the trustees. They are understood to be prepared to try to block the Delta Two bid – as they did earlier this year when CVC Capital Partners tried to take over Britain's third-largest grocery chain – if Delta Two does not make an acceptable offer to trustees. "We have constantly made clear the principles by which we will address any offer," the principal Sainsbury family members said in a statement. "Importantly, this includes ensuring that the pension scheme is properly looked after."

Delta Two and the trustees have been locked in confidential negotiations since last month. The rising tensions come before a crucial meeting this week between Paul Taylor, the head of Delta Two, and the Sainsbury's pension trustees.

Lawyers and bankers for Delta Two are understood to have completed their due diligence process last week after gaining access to Sainsbury's proprietary internal data in September. Sainsbury's board is thought to be ready to recommend the 600p-a-share offer to shareholders, even if a pension agreement is not reached first. Crucially, however, the trustees have no legal power to stop a takeover. Indeed, KKR and Stefano Pessina reached an agreement with the pension trustees of Alliance Boots well after they completed the £11bn takeover of the chemist earlier this year.

However, the Sainsbury family's backing of the trustees gives it much greater influence. It owns 18 per cent of the company and will vote against Delta Two's offer if it does not agree to pour more money into the pension fund. That would put Delta Two in a difficult position. Its offer relies on it securing the backing of 75 per cent of shareholders. If the Sainsbury family rebels, only another 7 per cent of investors would have to side with them to scupper the bid. Delta Two declined to comment yesterday, saying only that it was engaged in "ongoing, constructive discussions" with the trust.

Delta Two owns 25 per cent of Sainsbury and can count on the support of Robert Tchenguiz, the property investor who owns 10 per cent of the company and with whom Mr Taylor worked before setting up Delta Two. The Qatari group already has in place financing from the Dresdner Kleinwort, Credit Suisse and ABN Amro banks.

Both Delta Two and Sainsbury are keen to ensure they push forward with a deal that is deliverable. It is thought the pension funding gap is not insurmountable and that an agreement could be reached before the formal bid is tabled. The Sainsbury family objected to CVC's 582p-a-share offer because they though it undervalued the business and would saddle the company with too much debt. Initial objections to Delta Two's offer also centred on debt levels. The firm agreed to increase the equity element of its bid to assuage those fears.