Sainsbury’s (LSE: SBRY) shares jumped this morning after it emerged over the weekend that the company had become the target of activist investors. Specifically, insiders have let slip that Crystal Amber Fund Ltd, a London-based activist hedge fund, is in talks with several large overseas investors about a share raid on Sainsbury’s.
It is believed that Crystal Amber has been approached by a big American investor, who is looking at buying a sizeable stake in the food retailer. Crystal Amber is also looking at building its own stake in the retailer, to participate in the group’s turnaround.
Good news for investors
Whether or not these rumours have any truth behind them is yet to be seen. However, the market should find out soon, as activist funds usually build a large stake in their target companies. So, if Crystal Amber is planning a raid, the fund will have to report its position in Sainsbury’s to the market when the fund’s holding moves above 3%, as required by market rules.
For investors this could be great news. Activist hedge funds usually work to unlock value for shareholders. Some activist funds have been highly successful, achieving returns of 40% per annum this year alone as they shake up companies, replacing complacent management teams.
As well as a management shake-up, activists could force Sainsbury’s to safeguard its dividend by selling off parts of its property portfolio. This strategy could also help fend off other bids from rivals.
Takeover time?
If Crystal Amber really is considering a raid on Sainsbury’s, there’s a chance that a takeover could be in the pipeline. The Qatar Investment Authority still owns around 26% of Sainsbury’s and failed to mount a successful takeover during 2007. The sovereign wealth fund could be thinking of coming back for a second attempt with the support of outside investors.
Nevertheless, even if there’s some truth behind these rumours investors should approach Sainsbury’s with caution. The company is struggling to compete in the UK’s supermarket price war and some analysts are concerned that the company’s dividend payout is under threat. These concerns have pushed the retailers share price down to a ten-year low.
Additionally, even if an offer is made for Sainsbury’s, there’s no guarantee that a deal will go ahead. As many investors will tell you, buying shares just because the company is a possible takeover target is never a good idea. More often than not, the deal will fail to go ahead.
That being said, as a long-term play Sainsbury’s has many attractive qualities. So I strongly suggest that you take a closer look at the company.
