Sainsbury’s (SBRY) chief executive Mike Coupe may have been caught on camera singing ‘We’re in the money’, but a select group of fund managers could equally have felt the urge to hum the tune after yesterday’s share price surge.
Shares in Sainsbury’s are up 16.3% since news broke at the weekend of the supermarket’s sensational bid to acquire rival Asda.
That buoyed the small number of managers holding a significant chunk of the shares in their funds. Only a handful of managers do, perhaps unsurprisingly given the challenges the sector has faced in recent years, as discounters Aldi and Lidl have eaten away at market share.
Among them is Tony Yarrow (pictured) Citywire AA-rated manager of the £105 million Wise Multi-Asset Income fund. He held 1.9% of the portfolio in Sainsbury’s prior to yesterday’s surge, and reacted to the near-20% jump at Monday’s market open by halving his position to lock in some profits.
But he said that was a tactical move, and he will be looking to buy back into the shares, hailing the ‘mightily sensible’ deal.
He highlighted the strength of Asda’s balance sheet, which he said was ‘massively stronger’ than Sainsbury’s’, as it owned around three-quarters of its store space and held virtually no debt.
Sainsbury’s, by contrast, has around £1.3 billion of debt, and £1.8 billion if the supermarket’s preference shares are included in the calculations.
The effective price of £7.3 billion Sainsbury’s will be paying for Asda, in the form of £3 billion in cash and Asda owner Walmart (WMT.N) taking a 42% stake in the combined business, also represented good value given Asda’s £7.4 billion in net assets, Yarrow said.
‘It’s getting Asda for nothing,’ he said. ‘The management have worked together, know each other very well, and there are lots of purchasing synergies. The geographical fit is fantastic.
‘Why did Sainsbury’s go up 20% yesterday? It’s because this looks like a really good deal for them.’
'They should be applauded'
Alex Odd (pictured), whose stake in Sainsbury’s jumped into the top five holdings of his £4 million Odd Real Income fund after yesterday’s share price jump, representing around 3% of the portfolio, was equally enthusiastic about the deal.
‘It gives competitive scale in an industry that needs it,’ he said.
‘The guys running these businesses, they are taking a personal risk, they are putting themselves out there,’ he added.
‘They should be applauded. There is a difference between talking the talk and actually doing things.’
Managers holding the stock are also more optimistic than the analyst community on Sainsbury’s’ chances of getting the deal past the Competition and Markets Authority.
On the face of it the headline figures do not look good: Sainsbury’s and Asda’s merger would see the UK’s second and third largest supermarket chains become the UK market leader, pipping Tesco (TSCO), with the new top two combined accounting for two-thirds of the market.
Sainsbury’s and Asda’s argument is that a merger would be in the interest of the consumer, saying in yesterday’s announcement that it expected to lower prices on ‘many of the products customers buy regularly’ by 10%.
They will also argue the two chains offer a strong geographical fit, with Asda more prominent in the north and Sainsbury’s in the south.
Strong regional fit
Himsworth held 2.8% of his fund in Sainsbury’s prior to yesterday’s jump, and said the regional differentiation between Sainsbury’s and Asda could help tip the balance in their favour, arguing the CMA would look at ‘local competition’.
‘The competition authorities have perhaps grown up to realise that people don’t travel that far to a supermarket,’ he said. ‘I will guess the lawyers involved have some confidence it will go through.’
Odd agreed that the fact Sainsbury’s and Asda had gone public on the deal was a sign of their confidence in gaining approval for the merger.
‘I have no doubt Sainsbury’s and Asda are not doing this speculatively. I don’t think they would have gone to all this effort,’ he said.
Like Himsworth, he saw Sainsbury’s strength in the south, and Asda’s in the north, as crucial. ‘The way these businesses are actually run, they are local businesses,’ he said.
‘It’s a series of micro markets rather than one generic one. There are a lot of very good reasons why [the CMA] should agree to it.’
Yarrow said the CMA would need ‘a pretty good reason’ to reject the deal. ‘The commercial logic is obvious,’ he said.
Response to Amazon challenge
While on the face of it, a Sainsbury’s and Asda merger would create another huge supermarket player in the mould of Tesco, this ignored the fast-growing discounters like Aldi and Lidl, and the potential disruption that could be caused by an online businesses like Amazon (AMZN.O) entering the UK grocery market.
‘The argument is going to be Amazon dominate just about everything and it’s just a matter of time before they move into that business,’ he said.
Odd argued that Sainsbury’s bold move was a sign of the supermarket tackling the challenge posed by online retailers. He likened it to the transformation at Dixons, which moved away from a ‘pile ’em high, sell ‘em cheap’ model at the turn of the last decade.
‘Behind the scenes they were re-engineering their business model to compete with Amazon. Probably in supermarkets you are seeing something similar,’ he said.
Odd bought into Sainsbury’s in the second half of last year, increasingly impressed by the supermarket’s takeover of Argos owner Home Retail the catalyst.
The Argos move also attracted Himsworth, who started buying shares in the supermarket in the middle of 2016.
‘The first step was the move for Argos. That was the point I started getting very interested in it,’ he said.
Broader economic factors were also involved in Himsworth’s decision. ‘I hadn’t been in a food retailer for years, other than Booker. With the fall in inflation, food retail was not the place to be.
‘Inflation started coming back in a modest way in mid-2016, and I started getting involved.’
While Sainsbury’s’ swoop on Asda has stolen the headlines, it has overshadowed a broader recovery of the supermarket sector this year. Even before yesterday’s surge, Sainsbury’s shares had rallied 11.8% since the turn of the year, while Tesco is up 12.3% and Morrisons (MRW) 8.6%.
'More complicated' business will result
Simon Gergel (pictured), who holds around 2% of both his £552 million Merchants (MRCH) investment trust and £65 million Allianz UK Equity Income fund in Sainsbury’s argued tackling the discounters through lower prices on everyday items had been crucial.
‘The big players worked out a way of fighting back against them,’ he said.
Gergel is also a fan of Sainsbury’s’ Argos takeover, and thinks the chain could also play a big role in the merger, pointing to the cross-over between Argos and Asda customers.
But he sounded a more cautious note on the deal than others. A merged Sainsbury’s and Asda would be a ‘less differentiated, more complicated’ business, while Asda’s particular vulnerability to the discounters could undermine his initial rationale for investing in Sainsbury’s nearly five years ago.
Gergel said he had been attracted to Sainsbury’s ‘south east bias, slightly smaller stores and good non-food growth’, in a slightly less competitive geography. But with a meeting with Sainsbury’s management in the diary, he said it was ‘still too early to say’ how he would respond.