J Sainsbury PLC (LSE:SBRY) may have delivered a stone-faced reaction to its new major shareholder, but has sparked renewed speculation about whether it could be the prelude to a bigger deal or even a merger down the line.
The added success that supermarket rival Tesco PLC (LSE:TSCO) has enjoyed from buying wholesaler Booker in 2018 shows the logic of putting the two companies together, analysts said, though Sainsbury's has already has some deep-pocketed parties on its shareholder register.
Bestway, a British family-owned retail conglomerate that owns a large grocery wholesaler plus convenience stores and pharmacies, has snapped up 80.79mln shares in the FTSE 100-listed supermarket group, representing a 3.45% stake.
Founded in Essex in the 1970s by Anwar Pervez, now Sir Anwar and chairman of the group, Bestway is also owned by Zameer Choudrey, Baron Choudrey, who is group chief executive, and Younus Sheikh, co-founder and chair of the wholesale business.
The conglomerate, which generated revenue of £4.5bn and operating pre-tax profit of £399mln in the year to June 2022, owns the Costcutter, Well Pharmacy and Bargain Booze chains, as well as the Bestway Wholesale, which is the fourth largest wholesaler in the UK.
Bestway, which also owns a bank in Pakistan and has interests in the cement industry, said in a statement that it is not considering an offer for Sainsbury but it intends to hold the shares as an “investment”.
What's more, it said it wants to buy more Sainsbury shares, indicating any interested sellers can contact its broker Redburn.
Analysts pointed out that the statement means Bestway is prohibited from announcing an offer for six months – unless another offer came in – and will need to disclose any increases in its stake above 4%, 5% and so on.
Bestway declaration that it would “look forward to supporting the executive management team” was important, analysts at UBS said, as it “could potentially point to them engaging with Sainsbury management team”.
“Given the wholesale background of the group there may be an industrial logic to the investment with respect to SBRY potentially becoming a supply partner to Bestway.”
With Bestway owning Well Pharmacies, Sainsbuy's recent loss of its in-store Lloyds chemist concessions also could be an angle.
Publishing a statement inviting existing shareholders to sell some or all their stake to Bestway, “suggests it is serious about building up its stake”, said AJ Bell investment director Russ Mould.
Analyst Clive Black at Shore Capital said it “remains to be seen” if the move is “a pre-cursor to greater ownership aspirations or a route to try and collaborate with Sainsbury from a trading perspective”, as well as whether or not it has the aspirations or the resources to do so.
Black added that the potential suitor advertising its interest in buying more shares via Redburn, which is owned by Rothschilds, “is likely to help the return on their initial investment for Bestway but mean that any future purchase is at a higher price, an unusual approach, but no doubt Rothschilds know best...”
But having openly stated it wants to buy more shares “implies it wants a seat at the table”, said Mould.
“Having a stake above 3% arguably gives Bestway the power by which to demand proper conversations with the business and push for a seat on the board of directors.
“A notable stake in the business also suggests it is serious about wanting to collaborate. It’s very rare for these types of transactions to simply be about making money from owning the shares.”
If Bestway chooses to make a full bid down the line, its offer would need to be strong enough to persuade Qatar Investment Authority, which owns a 14.3% stake, though this is down previous heights above 25% - partly through recent sales to Czech billionaire Daniel Kretinsky, who owns just over 10% of the supermarket via his Vesa Equity Investment vehicle.
Be that as it may, Black said the surprise news was likely to spark some chatter around “both Sainsbury and the wider sector with respect to corporate activity and equity values”.
Sainsbury's current valuation metrics are “undemanding”, he said, with the shares currently yielding 10% on a free cash flow basis.
The shares rose 4% on Friday morning to 250p, levels last seen seven months' ago.
The news may have led to some short closing in Sainsbury stock, analysts said.