J Sainsbury (LSE: SBRY) isn’t a stock that’s prone to big daily swings. Yet last Friday it topped the FTSE 100 risers board, surging 5.5%.
This followed an announcement by Bestway Group, disclosing a 3.5% stake in the company worth close to £200m.
Sainsbury’s response to the announcement was: “We will engage with Bestway Group in line with our normal interactions with shareholders.”
Who is Bestway? Why is it interested in Sainsbury’s? And does its move tell us anything about UK retail stocks in general?
Who is Bestway?
Bestway is a private company owned by the British-Pakistani Pervez, Choudrey and Sheikh families. Its roots go back to a corner shop opened in Earl’s Court in 1963 by the group’s founder and chairman Sir Anwar Pervez.
You may not know its Pakistan-based operations — Bestway Cement and United Bank — but I’m sure you’ll have heard of one or more of its UK businesses. These include Bestway Wholesale, Bargain Booze, Costcutter and Well Pharmacy.
Last year, the conglomerate made a pre-tax profit of £400m on turnover of £4.5bn. If it were listed on the London Stock Exchange, it would sit comfortably at the top end of the FTSE 250.
Why the interest in Sainsbury’s?
Bestway said it’s “not considering” making an offer for Sainsbury’s, but “intends to hold its shares … for investment purposes and looks forward to supporting the executive management team.”
Bestway’s areas of business interest — with the exception of cement — mesh with Sainsbury’s operations. And its stake in the supermarket chain could give it leverage for discussions with management on a number of fronts.
Bestway is the UK’s largest independent wholesaler. Greater collaboration between Bestway Wholesale and Sainsbury’s could be on its agenda.
Another possibility is that it could angle for its Well Pharmacy business to replace Sainsbury’s current partner Lloyds Pharmacy. The latter has recently announced plans to close all 237 of its concessions in Sainsbury’s supermarkets.
What about a takeover bid?
Under the UK Takeover Code, because Bestway has stated it’s not considering making an offer, it’s prohibited from announcing an offer or possible offer for a period of six months.
Six months isn’t very long in the grand scheme of things, and there are circumstances in which Bestway can set the restrictions aside. These include if Sainsbury’s board agrees to it, or if a third party announces an offer.
Stakebuilding
Bestway has certainly indicated an interest in increasing its stake. Alongside declaring its holding, it said it “may look to make further market purchases of Sainsbury’s shares from time to time, subject to availability and price.”
It even went so far as to provide contact details for “institutional shareholders interested in selling their shares,” and advised that “retail investors should contact their brokers.”
More intriguingly still
An article in the Telegraph quoted Costcutter founder Colin Graves on a meeting he had with Bestway Wholesale managing director Dawood Pervez less than a year ago.
Graves said: “He asked for advice on what to do with the wider Bestway business. His concerns were that the group needed pulling together … I told him that the simplest answer would be to go out and to take Sainsbury’s private and combine the two groups.”
Feasibility
It’s not clear whether Bestway has the resources to put a bid together. But it may be workable, given its size, balance sheet and connections.
Sainsbury’s has two existing major shareholders who might, or might not be interested in backing a bid: the Qatar Investment Authority owns a 16% stake, and Czech billionaire Daniel Křetínsky owns 10% through his VESA private equity investment vehicle.
Cheap supermarkets
Bestway’s interest in Sainsbury’s follows the sale of Asda to ‘petrol station kings’ the Issa brothers and private equity firm TDR, and the takeover of Morrisons by US private equity house Clayton, Dubilier & Rice.
I think Bestway’s move on Sainsbury’s provides further evidence that trade buyers and private equity view UK supermarkets as persistently undervalued.
In the words of veteran retail analyst Clive Black: “If equity capital markets don’t value the recurring revenue and free cash generation of supermarkets, then other buckets of capital will.”
UK retailers
I suggested a fortnight ago that UK retail was generally undervalued, despite there being some great companies, with good management teams, sound business models, and robust balance sheets.
I asked, rhetorically: “What rational investor wouldn’t want to own a slice of such a business when it can be bought at a knock-down price?”
It seems that in the case of Sainsbury’s, Bestway agrees.
