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Well, the great private equity assault on Sainsbury’s is now officially over – for the time being at least. The consortium led by CVC Capital Partners pulled its 582p-a-share bid amid hostility from the founding Sainsbury family.
Meanwhile, on the other side of the Atlantic, the Dow Jones fell nearly 90 points, as minutes from the latest Federal Reserve interest-rate setting meeting suggested that the Fed remains very worried about inflation – meaning a US rate cut may not materialise as quickly as the market had hoped – if at all.
These two events don’t seem to have much in common at first. But the threat of rising US interest rates could make the Sainsbury family’s opposition to the private equity bid seem very sensible indeed…
The private equity bidders hoping to land Sainsbury have been thwarted by a lack of support from the family, who together still own 17% of the shares in the supermarket chain. The family apparently didn’t fancy the idea of seeing the group’s property portfolio – valued at around £7.5bn by most analysts – sold off then rented back to fund the deal.
Lord Sainsbury, quoted in The Telegraph, said: “Sainsbury’s success has been based on a strong balance sheet and a largely freehold property base. Eroding these attributes will make the company more vulnerable to competitive pressures which is not in the best long-term interests of the company, its customers, its staff, its shareholders or its pensioners.”
In any case, as John Foley says in Breakingviews.com: “It was not clear that they [the bidders] were offering anything Sainsbury’s was not capable of delivering on its own” – the group’s current strategy seems to be paying off, and there were no plans to change the management team. “CVC and its partners weren’t bringing anything new to Sainsbury’s – except added risk.”
Ultimately, Lord Sainsbury may well be right in putting the strength of the balance sheet ahead of a short-term boost in the share price. For a start, the fact that private equity is now taking tilts at tough targets like Sainsbury’s suggests that the sector has too much money and too few ideas – it can’t find value without engaging in ever more complicated financial engineering.
That suggests that we may be near a peak in the private equity cycle. Already plenty of people involved in the sector have expressed doubts as to how long the good times can last. The head of Blackstone, Stephen Schwartzman said over a year ago, that one sign of trouble ahead was “when dummies can get money and that’s where we are now”.
Meanwhile, Bill Conway, co-founder of Carlyle Group issued a memo at the start of this year, urging his staff to be more cautious in pursuing deals and warning that the global liquidity fuelling the boom would have to dry up sometime.
And once interest rates are rising – as they are now – companies that over-stretch themselves now could face problems when the business cycle turns, something which the International Monetary Fund warned of earlier this week. As The Herald reports, “the growing debt levels involved in winning control are making firms targeted in this way ‘more vulnerable to economic shocks’”.
And when the cycle does turn, suddenly the companies with solid balance sheets – which are growing increasingly scarce – won’t look quite so fuddy-duddy and boring any more.
Already, the FTSE 100’s biggest companies, which have slipped to surprisingly cheap levels because of the lack of private equity interest in them, are starting to once again attract the attention of big investors who like the look of their high yields and low ratings. You can find out more about why mega-caps look cheap in the latest issue of MoneyWeek, out tomorrow.
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Turning to the stock markets…
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In London, the blue-chip FTSE 100 ended the day 4 points lower, at 6,413, as the poor start on Wall Street weighed on investor sentiment. J Sainsbury was amongst the day’s biggest fallers, after private equity group CVC Capital withdrew its bid for the retailer. However, peer Marks & Spencer made topped the footsie leaderboard as investors speculated that it would be the next focus of private equity interest. For a full market report, see: London market close.
Elsewhere in Europe, the Paris CAC-40 closed 14 points lower, at 5,751, as investors took profits. In Frankfurt, the DAX-30 lost 18 points to end the day at 7,152.
On Wall Street, the minutes from the Federal Reserve’s latest rate-setting meeting dampened investors’ hopes of an interest rate cut in the near future. The Dow Jones ended its eight-day winning streak to close at 12,484, an 89-point fall. The tech-heavy Nasdaq lost 18 points to end the day at 2,459. And the S&P 500 was 9 points lower, at 1,438.
In Asia, concerns over US growth hit Japanese exporters such as Canon and saw the Nikkei head 129 points lower to close at 17,540.
Crude oil was slightly higher, at £62.18 a barrel this morning, and Brent spot was almost 1% higher, at $68.41, in London.
Spot gold had climbed to $679.50 in overnight trade, whilst silver had risen to $13.91.
And in London this morning, a report from the Royal Institute of Chartered Surveyors showed that three interest rate hikes from the BAnk of England had failed to cool the UK property market. The number of unsold properties on agents’ books fell to their lowest level in almost three years whilst the number of agents reporting rising prices continued to outweigh those reporting declines.
And our two recommended articles for today…
Beware the hedge fund marketing gimmicks
– Financial institutions are keen to repackage hedge fund strategies into new low-cost products that are a far cry from the original hedge fund idea, says Jan Vilhelmsen. If you’re looking for alpha, look elsewhere. To find out where the best hedge fund opportunities lie, read:
Beware the hedge fund marketing gimmicks
Are US protectionist threats about to become reality?
– After all the talk and bluster, US protectionism no longer seems like an empty threat. Fresh from testifying to the Senate Finance Committee, economist Stephen Roach explains why we should expect an anti-China currency bill to become law by the end of the year. To find out why he has serious misgivings, click here: Are US protectionist threats about to become reality?