Sainsbury's and Morrisons 'vulnerable' to a return to private ownership

Cantor Fitzgerald analyst Mike Dennis believes the grocers could attract attention from overseas retail giants and private equity firms because their share prices have dropped “to their lowest levels” for 20 years, but said any parties interested in their big four rival Tesco would find a takeover bid “too big to accommodate”.

Dennis suggested that bosses at the two supermarket chains could support a return to private ownership as their strategies could “be better carried out under a private holding”.

Grocery competition

Dennis compared the struggles of Tesco, Sainsbury’s and Morrisons to their big four rival Asda, as well as the Co-op, Waitrose, Aldi and Lidl, who are all “privately-run or partnership-run with limited amounts of visibility”.

Asda, which is owned by US retail behemoth Walmart, reported that like-for-likes plummeted 4.7% in its second quarter, but its finance chief Alex Russo said profits held flat during the period.

Upmarket grocer Waitrose, which is part of the John Lewis Partnership, has outperformed the market despite a fierce price war, while privately owned German duo Aldi and Lidl have eroded the market shares of their competitors and driven down margins.  

Mutual Co-operative is also enjoying a sales resurgence as retail boss Steve Murrells seeks to rejuvenate the grocer with his True North strategy.

Private benefits

Dennis said: “I can’t help but notice Morrisons’ share price now is a market cap of £3.8bn and a total market value – if you include pension deficits and debt – of about £6bn. Sainsbury’s is about £4.8bn market cap and £7.6bn.

“You have to say in the last 20 years, these companies are now down to their lowest levels in comparison to their sales and square footage. In my view, they look quite vulnerable.

“Some of the solutions that are required in this industry would probably be better carried out under a private holding than as a public company.”

Mike Dennis, Cantor Fitzgerald

“The sorts of issues within the industry are so significant that it would probably be beneficial to some retailers, both in food and general retail, to consider being private companies.

“Some of the solutions that are required in this industry would probably be better carried out under a private holding than as a public company.”

Dennis added: “Asda is semi-private because it’s not really distinguishable out of the Walmart international business. Other competitors like the Co-op, Waitrose, Aldi and Lidl are all, in various degrees, privately-run or partnership-run with limited amounts of visibility. Interestingly, those are the retailers that seem to be doing better.  

“Walmart has secured stable profits for Asda in the UK despite printing massive negative like-for-likes. We’ll see what the other not so well protected food retailers produce in their first half profits, but I suspect the difference is the global buying power and the ability to make significant cost savings through a larger parent company. That’s not there for the likes of Morrisons and Sainsbury’s.    

“I think retailers, retail management and major shareholders have to sit back and reconsider the whole capital structure and the necessity for a company to be a public company.”

Homeplus

Dennis said Morrisons would appeal to potential investors because it has no major shareholders. Sainsbury’s major shareholder, the Qatar Investment Authority, owns around 26% of the grocer, but would remain an attractive proposition to investors because of its “very valuable asset base”, Dennis argued.

And he pointed to Tesco’s ongoing bid to sell off its Homeplus business in South Korea as proof that there is an appetite for large-scale acquisitions of grocery retailers.

Referring to the bids of around £3.7bn that have reportedly been lodged for Tesco’s South Korean arm, Dennis said: “Admittedly there is a sovereign pension fund and a private equity company combined in most of those deals, but they are seemingly happy to put up £3.5bn plus in cash to do it.

“In these cases the deals would be slightly bigger by definition of being at a premium to the current share price, but you would need between £4bn and £6bn to get control of either Morrisons or Sainsbury’s. That is not an unachievable amount of capital to raise in the current market, given there are consortiums out there making these types of bids.”