Bestway’s £250m+ Sainsbury’s share grab: what next?

Friday’s shock announcement that wholesaler Bestway has taken a 3.45% stake in Sainsbury’s has certainly caused a stir in the industry.

While it hasn’t quite delivered the knockout blow of Tesco’s £3.7bn swoop for Booker on the very same day (27 January) six years earlier, this move has echoes of that deal. And it has the potential for another tie-up between one of the UK’s biggest supermarkets and one of its biggest wholesalers.

But ultimately, Friday’s move throws up more questions than it answers. What game is it playing here: could Bestway buy Sainsbury’s? Can it afford such a move? Could the deal go the other way, with Sainsbury’s snapping up Bestway? Short of a merger, is this a precursor to a collaboration/buying alliance between the two businesses?

Leveraged buyout?

Bestway’s commitment of more than £250m into Sainsbury’s shares (it took its stake to 4.47% on Wednesday after inviting institutional investors interested in selling shares to contact the group) is no small, speculative investment.

The group has clearly signalled an interest in the strategic future of the supermarket.

The mechanics of an actual takeover bid look difficult to justify, however.

Both Bestway and Sainsbury’s were explicit this was not the plan, and Bestway is prevented from making an approach for at least six months (unless Sainsbury’s itself drives a deal or a rival bid emerges), but in any case it doesn’t have the clout to execute a buyout.

While its 4.47% stake now makes Bestway the group’s fifth-largest investor, it remains well below the 14.3% held by the Qatar Investment Authority and the 10% held by Czech billionaire Daniel Kretinsky’s Vesa Equity Investment. Both would expect hefty premiums to be tempted to cash out – QIA taking a chunk of its shares at a near-record 595p a share complicates this further.

Sainsbury’s current market cap is just over £6bn, so with a typical takeover premium – CD&R eventually agreed a 60% premium to Morrisons’ share price – any suitor wouldn’t get too much change from £10bn.

 

“Lloyds’ core competency is community pharmacy – this is where their staff can make the difference with their customer relationships and their ‘behind the counter’ expertise. This is less easy to deliver within shop space owned by another retailer”

David Sables, CEO of Sentinel Management Consultants

Sainsbury’s is also significantly bigger than Bestway, with revenues of £30bn against Bestway’s £4.5bn, and about £2.7bn of that being wholesale revenues.

Any Bestway-driven acquisition attempt would require a huge amount of external debt – and even in the unlikely event of shareholders agreeing to a sale – the market conditions make the economics of big Morrisons/Asda-style leveraged buyouts close to impossible.

Private equity giant Apollo Global Management reportedly explored putting together a bid for Sainsbury’s last year, but couldn’t get any deal to make sense once the price of debt soared. It’s difficult to see how any approach now would be any different.

Bestway’s investment could flush out suitors with deeper pockets, but there are very few players able to fund a £10bn buyout without significant – and expensive – debt.

The City reaction suggests there is limited belief in an imminent approach for Sainsbury’s. While Bestway’s show of faith in the supermarket has seen shares rise 12.5%, that is not the reaction of a stock set for a bidding war.

For comparison, when news of an approach for Morrisons became public, the shares jumped 35%.

Bestway’s ambitions

Bestway has been linked with several potential deals in recent years. It has looked into buying Nisa both before and since its acquisition by the Co-op, and last year it made enquiries for McColl’s before losing out to Morrisons.

A £10bn buyout like this would be in a different league. It snapped up Costcutter in December 2020 – on that occasion its previous owner Bibby Line Group had made no secret of its intention to exit the convenience retail market. Before that it snapped up Conviviality Retail in April 2018, after the Bargain Booze owner had collapsed into administration.

But those deals were bargains.

Is Sainsbury’s up for it?

Bestway’s investment was reportedly as much a shock to Sainsbury’s as anyone else, and it may not want any dealings with Bestway.

Sainsbury’s has been trading well for the past couple of years as it doubles down on its ‘food first’ strategy, backed up by its Argos and Habitat brands. It pulled the plug on its UK and international wholesale ambitions in July 2021 to better focus on its core grocery operations. This decision meant abandoning its fledgling supply deal with symbol group SimplyFresh, which ironically is now 20% owned by Bestway.

We have seen many a u-turn in the grocery industry, but Sainsbury’s retreat from wholesale seems to have proven wise. It would be a surprise to dive back in now – but never say never, and Bestway’s scale and other capabilities might just make that a sufficiently attractive proposition.

Speaking to The Grocer in September 2020, then Tesco CEO Dave Lewis hailed the Booker deal as “one of the best mergers/acquisitions in the last decade in any sector”.

Foodservice and catering was seen as a key driver of Tesco’s initial interest in Booker, but just 5% of Bestway’s total sales currently come from foodservice.

Still there is certainly a prize for Sainsbury’s if it wanted to go down the own-brand supply route, with Bestway. Bestway has 3,182 stores operating under its various symbols – Costcutter, Best-one, Bargain Booze, Select Convenience and Wine Rack – albeit still less than half the number of stores under Booker’s portfolio.

Burning platform

More pressingly, Bestway still has an own-label issue to resolve. Its Costcutter retailers currently sell Co-op own-label distributed via the Nisa supply chain. This was written into its purchase of Costcutter in 2020, and the arrangement is set to run until 2026. At the time, it was felt this would create stability, while Bestway either developed its own solution or reached an agreement with another partner. Sainsbury’s would fit the bill.

All’s Well that Ends Well

Meanwhile, another business is preparing to split from Sainsbury’s. Private equity-owned Lloyds Pharmacy announced last week plans to shutter all 237 of its outlets currently operating within Sainsbury’s stores. Transferring pharmacy contracts to a series of multiple independent pharmacies is possible, but would create a potentially complex administrative headache for Sainsbury’s. That leaves a narrow choice of larger pharmacy giants.

Though there’s nothing to suggest the timing is anything but coincidental, Bestway’s Well pharmacy chain now looks like the obvious choice.

Of course Sainsbury’s could also take the pharmacy contracts it originally sold to Lloyds as part of the 2015 deal back into management. With former Boots MD Simon Roberts now in charge, the supermarket has the knowledge to do so, Shore Capital’s Clive Black highlights.

For either of these options to work, however, it’s thought Sainsbury’s would need to negotiate with the NHS to see if the pharmacy contracts vacated by Lloyds are still available, and potentially move the Lloyds staff back into the business to man the counters.

A third option is to permanently close the pharmacies.

Lloyds said the changes were made as part of a strategic review, in response to changing market conditions. Over the past few years, with real-terms falls in government funding, community pharmacies have seen their margins squeezed as the cost of distributing prescriptions has increased.

At the same time, the personal touch expected from a community pharmacy is “less easy to deliver within shop space owned by another retailer”, believes David Sables, CEO of Sentinel Management.

“Lloyds’ core competency is community pharmacy – this is where their staff can make the difference with their customer relationships and their ‘behind the counter’ expertise,” said Sables.

It would be a blow to the British public, and the many communities that rely on their local Lloyds branch, but it could be a sign that the model of store-based pharmacies is no longer feasible.

Well, then, might well be the answer.