All high finance involves some sorcery, but if billionaire property tycoon Robert Tchenguiz can bring about a £4bn cash payout to Sainsbury's shareholders, will it amount to a piece of accounting wizardry, or an act in black magic?
The trick is to separate the grocery business from the estimated £5-10bn property portfolio. This opco-propco split has become Tchenguiz's trademark: he's already done it at Somerfield, is trying it on at pub chain Mitchells & Butlers, and once planned something similar at Selfridges.
After upping his stake last week from 4.67% to 5.07%, Tchenguiz has urged the board to split the business into two separately listed companies. The retail profits would service a highly leveraged property business. Increasing Sainsbury's relatively modest £1.6bn borrowing to something approaching 60% of the value of its property assets would finance a £4bn payday for shareholders - far in excess of the 8p-a-share dividend in 2006.
With shareholders having lost out on a big payday following the collapse of the private equity bid last week, this prospect is likely to prove appealing in many quarters.
However, last weekend an unattributed member of the Sainsbury family described the plan as "voodoo economics". And analysts warn that separating retail from property could not only leave Sainsbury's dangerously exposed to takeovers but even jeopardise its recovery plans.
?What the Tchenguiz proposal does appear to have highlighted - a point conceded, apparently, by chairman Sir Philip Hampton - is the company's valuable but under-exploited property portfolio.
Sainsbury's 17 million sq ft property portfolio was valued at £5.4bn in the 2006 accounts. Even conservative observers now put it at £7.5bn. Chris Mackaness, retail partner at GVA Grimley, argues that all supermarkets have historically been undervalued: "You could value Sainsbury's stores as going concerns with sitting tenants, or you could just look at the value of the land. Often a seven to eight acre site with good road links on the edge of town will be worth far more for residential development than it would as retail space."
One of the most hawkish voices is Phil Jackson, head of food mergers and acquisitions at Grant Thornton. Sainsbury's has to let go of its "property comfort blanket", he says. "Sainsbury's has been sitting on a property asset that's risen in value thanks to no work of its own. I can see the appeal of borrowing against that to create a cash pile for shareholders. It's what Tesco already does in a small way.
"What the proposal has done is to hopefully make it realise that it either does a ?demerger or starts selling off parcels of its freehold."
But Clive Baker, MD at corporate advisory firm McQueen, believes the issue highlighted by Tchenguiz is that Sainsbury's earns less out of its property assets than Tesco. "Property values are directly linked to how much profit you can make from the space," he says. "King is clearly doing a good job in getting the top line moving but his real challenge is to improve the profitability to the levels of its leading rivals. Tesco's pre-rent profit is 10%, while Sainsbury's is 7%."
Baker warns that a full sale and leaseback programme would leave Sainsbury's exposed to takeovers and without the operational flexibility it needs. "The retail business would be smaller and less profitable, and in the long term, the property business might be tempted by better offers from more other retailers, including Tesco."
Planet Retail analyst Bryan Roberts also questions the rationale for a drastic sell-off, pointing out that Sainsbury's did a £2.07bn refinancing deal on the back of 127 stores in March 2006, the proceeds of which helped plug a hole in the pension scheme. Another 340 supermarkets and more than 200 c-stores are still untainted by lending and, says Roberts, "if there were a compelling reason to rejig the portfolio or for more sale-and-leasebacks, Sainsbury's would have done it by now. So the proposal is either a pointless exercise or about shareholders lining their pockets." ?
?Others question whether it will even work. "Tchenguiz is gambling on an avalanche of global money trying to get into UK property," says one analyst. "But commercial property yields can't go down much further than their current 4% so property investors are betting on being able to enhance rentals by improving usage or getting some kind of rental uplift. The split could mean Sainsbury's facing a rental bill of £400m a year and rising, set against a profit forecast for 2008 of £420-£540m. That will affect its value."
And an ex-business associate of Tchenguiz ? ?says investors won't be interested because supermarket rents are too hard to increase.
"Supermarkets are too good at engineering lease terms to limit rent increase to inflation, or to cap them.
"If you limit property income growth like that it takes all the fun out of the game for investors."n
The trick is to separate the grocery business from the estimated £5-10bn property portfolio. This opco-propco split has become Tchenguiz's trademark: he's already done it at Somerfield, is trying it on at pub chain Mitchells & Butlers, and once planned something similar at Selfridges.
After upping his stake last week from 4.67% to 5.07%, Tchenguiz has urged the board to split the business into two separately listed companies. The retail profits would service a highly leveraged property business. Increasing Sainsbury's relatively modest £1.6bn borrowing to something approaching 60% of the value of its property assets would finance a £4bn payday for shareholders - far in excess of the 8p-a-share dividend in 2006.
With shareholders having lost out on a big payday following the collapse of the private equity bid last week, this prospect is likely to prove appealing in many quarters.
However, last weekend an unattributed member of the Sainsbury family described the plan as "voodoo economics". And analysts warn that separating retail from property could not only leave Sainsbury's dangerously exposed to takeovers but even jeopardise its recovery plans.
?What the Tchenguiz proposal does appear to have highlighted - a point conceded, apparently, by chairman Sir Philip Hampton - is the company's valuable but under-exploited property portfolio.
Sainsbury's 17 million sq ft property portfolio was valued at £5.4bn in the 2006 accounts. Even conservative observers now put it at £7.5bn. Chris Mackaness, retail partner at GVA Grimley, argues that all supermarkets have historically been undervalued: "You could value Sainsbury's stores as going concerns with sitting tenants, or you could just look at the value of the land. Often a seven to eight acre site with good road links on the edge of town will be worth far more for residential development than it would as retail space."
One of the most hawkish voices is Phil Jackson, head of food mergers and acquisitions at Grant Thornton. Sainsbury's has to let go of its "property comfort blanket", he says. "Sainsbury's has been sitting on a property asset that's risen in value thanks to no work of its own. I can see the appeal of borrowing against that to create a cash pile for shareholders. It's what Tesco already does in a small way.
"What the proposal has done is to hopefully make it realise that it either does a ?demerger or starts selling off parcels of its freehold."
But Clive Baker, MD at corporate advisory firm McQueen, believes the issue highlighted by Tchenguiz is that Sainsbury's earns less out of its property assets than Tesco. "Property values are directly linked to how much profit you can make from the space," he says. "King is clearly doing a good job in getting the top line moving but his real challenge is to improve the profitability to the levels of its leading rivals. Tesco's pre-rent profit is 10%, while Sainsbury's is 7%."
Baker warns that a full sale and leaseback programme would leave Sainsbury's exposed to takeovers and without the operational flexibility it needs. "The retail business would be smaller and less profitable, and in the long term, the property business might be tempted by better offers from more other retailers, including Tesco."
Planet Retail analyst Bryan Roberts also questions the rationale for a drastic sell-off, pointing out that Sainsbury's did a £2.07bn refinancing deal on the back of 127 stores in March 2006, the proceeds of which helped plug a hole in the pension scheme. Another 340 supermarkets and more than 200 c-stores are still untainted by lending and, says Roberts, "if there were a compelling reason to rejig the portfolio or for more sale-and-leasebacks, Sainsbury's would have done it by now. So the proposal is either a pointless exercise or about shareholders lining their pockets." ?
?Others question whether it will even work. "Tchenguiz is gambling on an avalanche of global money trying to get into UK property," says one analyst. "But commercial property yields can't go down much further than their current 4% so property investors are betting on being able to enhance rentals by improving usage or getting some kind of rental uplift. The split could mean Sainsbury's facing a rental bill of £400m a year and rising, set against a profit forecast for 2008 of £420-£540m. That will affect its value."
And an ex-business associate of Tchenguiz ? ?says investors won't be interested because supermarket rents are too hard to increase.
"Supermarkets are too good at engineering lease terms to limit rent increase to inflation, or to cap them.
"If you limit property income growth like that it takes all the fun out of the game for investors."n
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