Could Tesco PLC Bid For J Sainsbury plc Or WM Morrison Supermarkets PLC?

Could Tesco PLC’s (LON: TSCO) quest for growth push it to acquire J Sainsbury plc (LON: SBRY) or WM Morrison Supermarkets PLC (LON: MRW)?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

After struggling for more than two years with falling sales, Tesco’s (LSE: TSCO) recovery finally seems to be gaining traction. 

Indeed, Tesco’s first-half report was full of positive figures. The volume of goods sold at Tesco’s stores rose 1.4% during the period, and the number of transactions rose 1.5% as Tesco started to win back customers. Further, in the six months to August 29, Tesco generated free cash flow of £281m, compared with a £134m outflow in the year-earlier period. Many City analysts weren’t expecting Tesco to generate any cash at all. 

Asset sales have also helped to get Tesco’s debt under control. 

Should you invest £1,000 in Ecora Resources Plc right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Ecora Resources Plc made the list?

See the 6 stocks

Still, it’s clear that Tesco’s sales will continue to contract for the foreseeable future as, while the company is reporting an increasing volume of goods sold, food deflation is pushing prices down across the grocery sector. To offset this decline, Tesco could decide to go all-out and make a bid for one of its smaller peers, Sainsbury’s (LSE: SBRY) or Morrisons (LSE: MRW).

This proposal isn’t as ludicrous as it first appears. Using some financial alchemy, Tesco could actually improve the state of its balance sheet by buying one of its smaller peers and boost sales at the same time. 

For example, both Morrisons and Sainsbury’s are both valued at less than the value of the property on their balance sheets, indicating that it is cheaper for Tesco to buy one of the companies than build the extra capacity itself. Sainsbury’s property is worth £9.6bn, and Morrisons’ real estate is worth £7.3bn, compared to market caps of £4.9bn and £3.6bn respectively. 

To make the most of any deal Tesco would need to make its offer for Sainsbury’s or Morrisons an all-stock transaction, or 75% stock with a 25% cash kicker. An all-stock deal would give Tesco more financial flexibility as, when the deal completes, the supermarket giant would be able to sell a portion of the acquired real estate to pay down debt. In many towns and cities there’s an overlap between Morrisons and Tesco stores’ catchment areas, so selling stores with an overlap wouldn’t cost Tesco too much regarding sales. Selling half of Morrisons’ real estate (£3.7bn) would allow the enlarged Tesco to pay off debt acquired from Morrisons (£2.5bn) and pay down an additional £1.7bn of Tesco’s legacy debt. Moreover, the deal would boost Tesco’s sales by over £8bn (after factoring in 50% store sales) and could increase group free cash flow by 40%.

Acquiring Sainsbury’s could be even more beneficial for Tesco. As Sainsbury’s balance sheet is much stronger than that Morrisons’ with only £2.8bn of debt and £9.6bn of real estate, Tesco, the acquirer, could raise £4.8bn from property sales, using £2.8bn to pay off Sainsbury’s acquired debt and £2bn to pay off legacy debt.

Investing in AI: 3 Stocks with Huge Potential!

🤖 Are you fascinated by the potential of AI? 🤖

Imagine investing in cutting-edge technology just once, then watching as it evolves and grows, transforming industries and potentially even yielding substantial returns.

If the idea of being part of the AI revolution excites you, along with the prospect of significant potential gains on your initial investment…

Then you won't want to miss this special report inside Motley Fool Share Advisor – 'AI Front Runners: 3 Surprising Stocks Riding The AI Wave’!

And today, we're giving you exclusive access to ONE of these top AI stock picks, absolutely free!

Get your free AI stock pick

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Prediction: 12 months from now, £5,000 invested in Tesla stock could be worth…

Tesla stock has endured a miserable year so far, falling by 29%. Muhammad Cheema takes a look at how it…

Read more »

Investing Articles

See what £10,000 invested in Tesla shares at their mid-December peak is worth today 

As the world absorbs the full scale of Donald Trump's tariffs, Tesla shares are reeling. Investors who bought the stock…

Read more »

Hand flipping wooden cubes for change wording" Panic " to " Calm".
Dividend Shares

2 ‘safe’ LSE dividend stocks to consider as global markets sell off

As global markets experience high levels of volatility due to economic uncertainty, investors are piling into these ‘safe-haven’ dividend stocks.

Read more »

Investing Articles

US stock market rout: an unmissable opportunity for investors?

His tech-heavy portfolio has been smashed by Trump’s tariffs. However, Dr James Fox believes there could be some opportunities in…

Read more »

Investing Articles

After a 13% ‘Trump tariff’ fall, is the Barclays share price too cheap to miss?

Does the Barclays share price fall mean we should all panic and run screaming from the stock market? Nah, of…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

2 investment trusts to consider for a Stocks and Shares ISA

These two investment trusts have a different focus -- but our writer sees both as worth considering, one more for…

Read more »

Investing Articles

Deutsche Bank reiterates Buy rating on 9.6% yielding FTSE 250 stock that was “most shorted in UK”

Our writer investigates why a major broker remains optimistic about a FTSE 250 stock that was once the most shorted…

Read more »

Investing Articles

2 things to remember when stock markets are turbulent

US trade policy has rattled the stock markets in New York, London and elsewhere. Our writer outlines a couple of…

Read more »