The guilty men

Who was really at fault for the Sainsbury’s debacle? Nicholas Lockley points the finger.

The failure of the Qatari-backed investment firm Delta Two to acquire UK grocer Sainsbury’s after a protracted negotiation has prompted a debate of who is to blame. Several potentially guilty candidates are in the frame.

According to one commentator, the Qatari investment authority was divided, naive and never a serious bidder. On this account, compared to the more polished operation of their acquisitive GCC rival Dubai Holding, Delta Two came up short on more than just the price.

However, the Qataris' track record of completed deals is solid enough, if small. Certainly, you cannot fault their ambition in tilting at Sainsbury's. Yesterday Delta Two said that an increase in funding costs, combined with a “deterioration” in the credit markets, meant that the deal was no longer in the interests of stakeholders. This seems legitimate enough: nobody could have predicted the full impact of the liquidity crisis on mega deals.

The pension fund trustees have also come under fire. Critics say it was their intransigence that stymied the deal.

Indeed, the trustees' demand for more money to help pay off the company's pension deficit appears to have been a major stumbling block. On 26 October, the day Delta Two was given its deadline by the UK Takeover Panel of 8 November, the fund announced that it was seeking an additional £500 million ($1 billion) to stump up the equity portion of its 600 pence ($12.48) per share offer.

Delta Two would not say why it had to improve its bid, but the announcement followed longwinded talks with the supermarket chain's pension trustees. In the end, Delta Two said another £500 million was making the bid too expensive, especially given developments in the debt market.

So the trustees killed the deal? In reality, their power was limited and a settlement could have been agreed – at least until the Sainsbury family with its 18 percent holding swung behind their demands.

And there lies the rub. It was the Sainsburys that did for the deal. If the bid’s collapse has done anything it has shown how fundamentally opposed the family is to financial investors, unless they are willing to submit to the most exacting of terms.  

Richard Jones, principal at Punter Southall Transaction Services, makles the point quite explicitly: “This effectively swept the rug from under Delta Two and meant that they could not settle with the trustees on a normal basis, i.e. taking account of the trustee powers and the actual position.  This meant that they effectively had to cede to the trustees opening gambit, excessive demands given their powers, in order to get the Sainsbury family to vote for the deal.”

After the bid’s abandonment yesterday shares in Sainsbury's fell 18.6 percent, or £1.03 ($2.14). Delta Two is looking at a substantial paper loss on the shares it has acquired. Under the Takeover Code, it cannot  bid again for at least six months, even though a fresh bid may be the only alternative to the loss for the firm, unless the share price can overcome the Sainsbury family discount.

The disproportionate influence of the Sainsbury family is something public investors in the stock will have to live with. With competition issues ruling out most trade buyers, and private equity having been rejected earlier in the year, it is hard to say where a new bidder could come from. Now Justin King, the chain’s chief executive, will have to pump his returns to lift the share price by at least 20 percent just to get back to square one.