Against expectations, Sainsbury adds to property

Though its private equity bidders may have wanted to sell off its property assets, the chain has actually bought back 38 of its stores since rejecting their offers.

J Sainsbury, the UK’s third largest supermarket chain, says it will invest £273 million ($546 million) in buying back ownership of 38 of its stores from British Land, Europe’s largest real estate company. The retailer has been leasing the stores for the past 20 years.
The grocer said it plans to add more space for non-food products, an area which has performed well for the company. The property venture with British Land will have a net asset value of £544 million, and includes about 8 percent of Sainsbury's total supermarket real estate.

The buyback is the exact opposite of the conventional logic for the chain last year, when private equity firms were involved in a bidding war to acquire the company. CVC Capital Partners and Qatar-backed Three Delta both made unsuccessful bids for the chain, as property tycoon Robert Tchenguiz increased his stake in the company in anticipation of a deal. Tchenguiz, and many others in the industry, had urged the chain to sell off its property assets in order to increase liquidity. At the time many expected the private equity bidders to pursue this strategy.

But now it appears the company is undertaking a strategy to acquire more property in order to have more control over what it can do with its stores. Rather than selling off its property assets or organizing an embedded op co/prop co corporate structure, in which the operational assets are split from the real estate, the company may be seeking to gain greater control over its property assets.
On the other hand Tesco, the next largest UK grocer, raised £570 million last year by selling a 50 percent stake in 21 of its stores to British Land. However the company still owns more of its store properties than Sainsbury, and it also seems to be seeking more flexibility in what it can do with its stores.

It would appear that both Tchenguiz and Delta Two, who are both shareholders, were not a part of the decision to buy back the properties. On a conference call discussing the deal, Sainsbury CEO Justin King said the company didn't discuss the venture with Tchenguiz or Delta Two. He also said the company has plans to remodel and enhance its property assets.

Three Delta called off its bid for Sainsbury in November after its backer, sovereign fund the Qatari Investment Authority, decided against funding a £500 million equity increase.  The firm had initially looked to bid with £3.6 billion of equity at the pre-due diligence stage, while still paying £6.00 per share for the company.  In April a CVC Capital Partners-led consortium also pulled out of talks with the supermarket. The consortium included US firms Blackstone, Kohlberg Kravis Roberts and TPG.