It is fair to assume that CVC Capital partners and the rest of the consortium eyeing J Sainsbury have been forced to declare their hand prematurely.
Received wisdom has it that American financial regulation is much tougher than the British variety. But those who have tried to convince the UK’s Takeover Panel that a sudden price move, say on the back of a media report, is just speculative hot air rather than a market-abusive leak will probably tell you otherwise.
Now that the private equity cat is well and truly out of the Sainsbury’s carrier bag, CVC et al face a terribly tough job in convincing the markets that the mathematical conclusions everyone is jumping to are just not realistic.
Not only have their plans leaked before an approach had even been made, but they have a “benchmark” piece of number crunching in public circulation that will cause all existing shareholders in Sainsbury to shout “Pay Up.”
So, if this putative deal is not to fall straight over, CVC and their partners need to shoot down these numbers, from Steve Davies at Numis Securities, before they gain too much traction.
Essentially, Davies argues that if you strip the property out of Sainsbury, leaving yourself with a pure grocer, this business is capable of producing annual ebitda (after some heavy depreciation charges and also the rent bill for using the stores) that rises from £725m in year one through to £1.42bn in year five.
The new operating company would eat some cash for the first four years, before turning cash positive — to the tune of £248m — in year five. Debt during the period would range between £1.43bn and £1.9bn.
Against an initial equity investment of £2.88bn, enterprise value would have grown to £5.7bn in year three or £10bn by year five. In short, a respectable PE-style internal rate of return of somewhere in the mid-20s would be easily attainable.
So how may we can help CVC? The obvious point is that Numis are forecasting very rosy growth levels for the Sainsbury business — typically 15 per cent per annum. It would be very tough indeed to grow both food and non-food sales at such a pace over a sustained period. And, even if there was a cunning plan to achieve this, fuelling such growth tends to require some lumpy investment and heavy ongoing costs — none of which seem to figure highly in the Numis research.
And what can we say in support of Justin King at Sainsbury? Well, we could encourage him to read Lombard on the subject, where Henry Kravis meets Jamie Oliver and emerges as a barbarian cook, and then comfort him with the fact, as Lex points out, that the PE industry looks to have arrived too late on this one. Mr King is now a long way into his recovery programme and the progress of the share price indicates that the market appreciates this: the net result is that Sainsbury just looks too expensive.