U.S. private equity thinks it can teach the Brits a thing or two about selling groceries

The U.K.’s second-largest grocer Sainsbury’s is being courted by U.S. private equity firm Apollo Global Management for a possible buyout deal, Bloomberg reported, making it the latest U.K. grocer to come in the sights of cash-rich American buyout groups.

The deal is reported to be more than £7 billion (about $9.6 billion), according to the Sunday Times, but it noted that Apollo’s interest in Sainbury’s was only “exploratory,” without advisers or formal discussions.   

But the rumors still excited traders. Shares in J Sainsbury PLC jumped by as much as 15.37% today—pushing the stock up 50.44% for the year.

Sainsbury’s is more upmarket than most other U.K. supermarkets, putting it in the price range of British-owned Waitrose and London-listed Tesco, as opposed to competitors like Morrison’s or Asda. Sainsbury’s premium range selection—otherwise known as Sainsbury’s “Taste the Difference”—is more expensive than both Asda and Morrison’s, and its stores are situated in more affluent parts of the U.K.

Regardless of food-quality offerings, however, the entire U.K. supermarket industry appear to be set on consolidating. Sainsbury’s is no exception.

Super-consolidating markets

Talk of a Sainsbury’s acquisition is set against the backdrop of an M&A bidding war for Morrison’s—officially named Wm Morrison Supermarkets PLC.

The board at the cheaper and smaller Morrison’s just unanimously accepted a £7 billion takeover bid from U.S. private equity firm Clayton Dubilier & Rice, which is the latest price accepted in a bidding war between CD&R and SoftBank-backed Fortress Investment Group.

Fortress may make another larger bid for the asset, a bid that Apollo is also considering backing.

Sainsbury’s itself has tried to consolidate before, once attempting to merge with Asda before the deal was blocked by U.K. antitrust regulators. The rejected deal launched a bidding war for Asda, which saw Apollo Global Management eventually lose out to Mohsin and Zuber Issa—the brothers who run EG Group—and TDR Capital.

The M&A craze in the British supermarket industry comes in reaction to a confluence of market forces that has made the sector more attractive. The supermarket sector has long had reliable cash flows and large property portfolios, and now an improving post-pandemic economy, with elevated sales and changed shopping habits, has improved the sector’s financial outlook.

The buyout interest isn’t exclusive to just supermarkets. U.K. pharmacy chain Boots, the Pizza Express family restaurants, and upmarket lunch spot Leon have all been sold to private companies in recent years.

In order to be successful, Apollo will have to convince Sainsbury’s largest shareholders. Sainsbury’s two largest shareholders are the Qatar Investment Authority and Daniel Kretinsky, a Czech billionaire, who combined own a quarter of the company; all together, large shareholders possess more than 41% of the chain’s shares.

A Berenberg analysis in July saw an increased though small chance of Sainsbury’s becoming a takeover target, in light of the Morrison’s bidding war, but noted at the time that the upscale group’s lower free float, at 53%, made it a more difficult target.

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