Private-equity trio mull £10bn takeover bid for Sainsbury's

Three private-equity firms revealed they are mulling a £10bn bid for J Sainsbury yesterday, putting a rocket under shares in the supermarket group and other retailers.

KKR, CVC Capital and Blackstone said they were at the "preliminary stages of assessing" an offer for Britain's third-biggest supermarket chain.

Shares in Sainsbury's leapt 14 per cent to 507p, after hitting an intra-day high of 526.5p, valuing the group at £8.7bn.

The private-equity firms were forced to show their hand after feverish bid speculation triggered by the sale on Wednesday of 40 million Sainsbury's shares by a blind trust run on behalf of Lord Sainsbury of Turville, the former science minister.

The prospect of what would be Europe's biggest leveraged buyout sent other retail stocks higher. Five of the FTSE 100's biggest risers were retailers, including Wm Morrison, which closed up 6 per cent at 300.75p.

Speaking in Davos last week, Stephen Schwarzman, Blackstone's chairman and chief executive, hinted that the industry had ever- bigger targets in its sights. "Why wouldn't we be able to buy the same number of companies that are three times the size [of previous deals]?" He added it was "incorrect" to assume there was too much money chasing deals.

Analysts said financial buyers were attracted by Sainsbury's property estate, which was last revalued by the company more than two decades ago, but could be worth at least £7.5bn. Steve Davies, at Numis Securities, speculated that the bid consortium could afford to pay at least 600p a share which would value Sainsbury's at £10.3bn. Despite the jump in the shares, most City observers cast doubt on a bid materialising. One rival private-equity partner said: "The timing seems odd because the group is halfway through a recovery programme. The property market is red-hot, but it has been for a while."

Analysts at Merrill Lynch said: "The real question we want to ask is: What can they [KKR, Blackstone and CVC] see today that they could not, say, two years ago which is now justifying them in contemplating an offer £3bn to £4bn higher than would have been necessary back then?"

Philip Dorgan, at Panmure Gordon, said: "What would the Competition Commission say? In the long run, when it struggles [in private-equity hands], they'll put the prices up which isn't good for consumers. The shares have moved to a level that suggests the probability of a bid happening is low."

A number of recent approaches for retailers from private-equity groups have failed - either due to the size of the target's pension deficit or because investors have deemed the offer ungenerous. Sainsbury's has a £350m pension deficit, which analysts at Citigroup flagged could pose "issues".

In a joint statement, KKR, Blackstone and CVC said: "No decision has been made regarding the relative merits of an offer and as a consequence there can be no assurance that any offer for Sainsbury will be forthcoming."

Sainsbury's yesterday refused to comment on the grounds that "no proposal has been received" from the bid consortium. Its financial advisers, at UBS and Morgan Stanley, are seeking meetings with the consortium to try to clarify its intention.

Justin King, who took over from Sir Peter Davis as chief executive in March 2004, has one year left to deliver a three-year turn-around. Under his leadership, underlying sales have soared for eight consecutive quarters but he has yet to prove conclusively that profit growth will follow.

Wednesday's share sale by Judith Portrait, the lawyer in charge of Lord Sainsbury's blind trust, cut the family's biggest single stake to 13.8 per cent. This made it only the second biggest shareholder behind AXA, which holds 15 per cent through AllianceBernstein.

The wider family, which founded the supermarket chain in 1869, has slashed its holding from 36 per cent in the past 18 months. It is unclear how much it controls since the stakes held by other family members have dropped below the 3 per cent threshold that forces investors to reveal their holding.

Later this month, Lord Sainsbury, who quit as Science minister in November, will regain control of his shares for the first time since 1998.