Tesco should prove more enticing to buyers than Sainsbury’s despite its £30 billion-plus price tag, an expert has claimed.
Buyout speculation sent Sainsbury’s share price soaring to a seven-year high last week.
However, Bernstein analyst William Woods virtually dismissed the prospect of a Sainsbury’s takeover and labelled Tesco “the most attractive of the UK food retailers at a fundamental level”.
He told The Grocer: “The Tesco business is attractive for private equity investors.
“The turnaround is complete, the business is simplified, diversified and dominant, and the next five years are set to be a story of consistent, strong execution and returning to shareholders.”
Woods also talked up the Big 4 grocer’s wholesale business and its online sales of almost £5 billion.
On the other hand, he suggested the scale of a deal would ward off buyers, with Tesco’s market cap and debt reaching roughly £32 billion.
Moreover, its loss-making bank and pension deficit (the largest of any British food retailer) could deflate investor interest.
Despite speculation that Sainsbury’s could be bought out by private equity firm Apollo, which is keen to acquire a UK grocer, Woods claimed its chances are “relatively low”.
“We currently don’t expect a Sainsbury’s offer given the challenges to free cash flow, current management’s strategy and the complications of a bank and Argos,” he continued.
The supermarket is thought to be in talks with buyout firm Centerbridge Partners to sell its bank for £200 million.
Even if it offloaded the bank, which made a £24 million loss last year, Woods said that Morrisons represents a better opportunity for private equity buyers.
Sainsbury’s owns just 50 to 60 per cent of its freeholds, compared to its Bradford-based rival’s 85 per cent.
Some believe Morrisons properties, officially priced at £5.87 billion, are massively undervalued and could be worth up to £9 billion.
The retailer is the subject of a bidding war between two US buyout companies, which has pushed shares up to around 290p.