- 16 Mar 07, 03:00 PM
Press and City – myself included – have been obsessing with when the private equity quartet stalking J Sainsbury will tell the supermarket’s board the price it is prepared to pay to buy the business, so that proper negotiations may begin.
But we may have been looking in the wrong place for the talks that will determine the future of this celebrated retailing name. The dialogue that matters – which I think is going on right now – is between the four deep-pocketed giants of private equity and the trustees of Sainsbury’s pension fund.
In something of a re-run of the big event in Philip Green’s abortive attempt to buy Marks and Spencer, the bidding quadruped needs to know how much cash it will be obliged to put into Sainsbury’s pension fund. Only when that liability is clear can it decide how much it can afford to pay for the retailer.
The deficit in Sainsbury’s pension fund of £276m as of October 7 2006 may not look much by comparison with the billions at the disposals of such well-heeled private equity funds as CVC, Blackstone, KKR and TPG. And it doesn’t look huge in comparison with Sainsbury’s stock market value of £9.4bn.
But the pension-fund liability could in fact determine whether the quartet can offer Sainsbury’s board and its shareholders enough to carry off the prey.
First, Sainsbury – as currently constituted – has agreed to pay off the fund deficit over eight years.
Second, Sainsbury – as owned by private equity – would have billions of pounds of property assets stripped out of it and billions of pounds of debt loaded on to it. So it would become a riskier business with less deep pockets.
Third, the pension fund trustees would want the net fund liability paid off quicker than over eight years if Sainsbury became a more fragile business under new ownership.
Fourth, the trustees may also feel that the increase in the riskiness of the parent company requires a decrease in risk at the fund itself. So it may decide it would have to cut its current holdings of equities from the current 62% of assets and increase its holdings of bonds. Such a switch from equities to bonds would probably have the paradoxical effect of increasing net scheme liabilities to a figure in excess of £276m.
So the fund trustees may insist on a one-off, immediate cash injection from the putative bidders of several hundred million pounds. And that could make all the difference between whether the private-equity four can offer 540p per share, which is a price the Sainsbury board would probably turn down, and 570p per share, a price the Sainsbury directors would feel under pressure to take.
Or to put it another way, the fate of J Sainsbury may be settled by its shy, anonymous pension-fund trustees.
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