Not bad, the Tesco results, were they? A quick back-of-an-envelope calculation tells me that Tesco's £2.55bn profits in 2006 were almost 10 times the £267m reported by Sainsbury's last year. In fact, at £520m, the increase in Tesco's profits on 2006 was double the total profits of Sainsbury's last year. The other figure that caught my eye was the £3bn Tesco announced it was simultaneously returning to shareholders. Sainsbury's is under pressure to return to shareholders an even greater amount, £4bn, through the opco/propco sale-and-leaseback proposals of property investor Robert Tchenguiz. Not surprisingly, it's received short shrift from the Sainsbury family, reportedly described by one insider as "voodoo economics". But the thing that intrigues me is why Sainsbury's is under pressure to return so much money to shareholders, while Tesco shareholders appear happy to make do with a smaller amount. Supermarkets that own their own land have always been undervalued. That they choose not to pay what a property developer would get on the open market keeps the profits up, which in the case of Sainsbury's seems critical right now, as I explained last week. No question: a business like Sainsbury's would be worth a lot more in book value terms if it uncoupled the property assets. But at least with debt you can renegotiate it. With sale and leaseback you get all of the downsides of owning property and none of the upside. Even if the two boards started off with identical shareholders, they would soon diverge, as would their interests (see Analysis, p28). Tesco, on the other hand, by returning this sum in a series of joint ventures, has highlighted the value of its property, without losing control. I know which way I'd go.

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