LONDON (Reuters) - Private equity firm CVC was battling to keep its bid for J. Sainsbury afloat on Tuesday, after its bidding partners pulled out and the food retailer’s founding family rejected an improved 10.1 billion pound offer, sources close to the matter said.
Shares in Sainsbury, the country’s third-biggest supermarket group, fell more than 5 percent on speculation that CVC would be unable to raise the bid again on its own.
Sources familiar with the situation said buyout groups Texas Pacific and Blackstone had left the bidding team even before CVC had proposed a new offer of 582 pence a share in cash, up 3.6 percent from its previous proposal. Kohlberg Kravis Roberts left the private equity consortium last week.
Sainsbury declined to comment, but a person close to its founding family — which owns about 18 percent of the shares — reiterated that it would oppose opening the company’s books for a bid of less than 600 pence a share.
“What part of ‘no’ don’t they understand,” the person told Reuters. David Sainsbury, a former chairman of the company, is the family’s biggest shareholder with a 7.75 percent stake.
Newspapers have said other shareholders, such as property magnate Robert Tchenguiz, agreed with the family position.
“The sticking point is the family,” another source close to the situation said.
Sainsbury shares have risen around a quarter in value since February 2, when the CVC team announced its bid plans, on hopes of a takeover battle.
Clothing and food retailer Marks and Spencer has said it would not rule out making a counterbid for Sainsbury, while sources close to the matter have said the second-biggest grocer, Wal Mart-owned Asda, was looking at whether it could get a bid past competition regulators.
Under a deadline set by the Takeover Panel, CVC has until Friday to say publicly whether or not it is bidding for Sainsbury. It was not immediately clear whether it would be able to recruit new partners.
CVC has offered Sainsbury employees 15 percent of the company, and another 25 percent of equity has been earmarked for other shareholders who would like to remain investors, sources familiar with the situation said.
It also plans to create 16,000 jobs and expand store space by 3 million square feet, one of the sources said, but would not provide further details.
If completed, a deal would vie with a possible takeover of drugs retailer and wholesaler Alliance Boots to be Europe’s biggest leveraged buyout.
Alliance Boots is also being pursued by cash-rich private equity firms, who are taking advantage of cheap borrowing costs to buy companies whose property assets and strong cash flows allow them to pay off debt quickly.
Sainsbury is attractive to would-be buyers because of its property assets, which some analysts estimate are worth more than 7.5 billion pounds, and also for its recovery potential as it fights back from a decade of underperformance during which it lost ground to Asda and market leader Tesco.
Numis Securities analysts said they believed venture capitalists could afford to pay 600 pence a share for Sainsbury.
But Seymour Pierce’s Richard Ratner said a bid at 582 pence a share already looked a stretch. “We wonder whether the VCs are so flush with cash that they have to do a deal, or whether egos are dictating the pace,” he wrote in a research note.
The cost of insuring Sainsbury debt against default fell in early trade, despite the increased bid, as speculation mounted the Sainsbury family would oppose a deal. Five-year default swaps on Sainsbury fell 20 basis points to 120 basis points, meaning it would cost 120,000 euros ($160,100) a year to insure 10 million euros of the company’s debt against default.
Founded in 1869 as a small dairy shop in one of the poorest parts of London, Sainsbury runs about 480 supermarkets, 290 convenience stores and an online bank. It has 16.4 percent of Britain’s 125 billion-pound a year grocery market.
Additional reporting by Mark Potter and Richard Barley