Is the Sainsbury’s share price (SBRY) about to explode?

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The J Sainsbury (LSE: SBRY) share price has performed brilliantly over the last year, rising 57% by last Friday’s close. It’s up another 11% this morning. Could it be about to explode?

Sainsbury’s share price: ready to rocket?

According to headlines over the weekend, private equity group Apollo is taking a closer look at Sainsbury. While this has been referred to as merely “exploratory” (according to the Sunday Times), it does suggest that we could be about to see an offer submitted for the FTSE 100 member.

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This shouldn’t really come as a surprise given the bidding war that has erupted for fellow listed supermarket Morrisons. Last week, it was revealed that management would be recommending holders accept a 285p per share bid for the company from Clayton, Dubilier & Rice (CD&R). This valued MRW at £7bn, up from the £6.7bn offer received from rival Fortress.

Sainsbury’s attractions aren’t hard to fathom either. For one, the shares still look reasonably valued and, before this morning, changed hands for a little less than 14 times earnings. It’s also got a big property portfolio and currently has the second-largest share of the UK grocery market.

However, this is not to say that I would be guaranteed a great return on my investment if I bought today.

No guarantees

One rather obvious risk to buying SBRY now is that it won’t actually receive a bid. One can name many firms in the FTSE 100 that have looked like prime takeover candidates for years but that are still to be snapped up. Broadcaster ITV springs to mind. Luxury fashion firm Burberry is another. Both already occupy places in my portfolio. However, I own them because they are, in my view, great businesses. If I were to buy the supermarket’s stock now, I’d need to be confident that Sainsbury is capable of delivering a solid gain without any bid interest.

A further, potential issue here is that Apollo could join forces with Fortress and launch another counter bid for Morrisons. Were this to happen, any talk about acquiring its rival would likely end and the Sainsburys share price rally may run out of steam.

It’s also worth highlighting that SBRY is among the most shorted stocks on the London Stock Exchange, according to shorttracker.co.uk. In other words, a good proportion of traders are betting that the Sainsbury’s share price will fall.

Of course, this could actually work in investors’ favour if bid rumours grow. In such a scenario, the aforementioned traders would rush to close their positions. The resultant ‘short squeeze’ would likely put a rocket under the Sainsbury’s share price. We may already be seeing some of this today.

Undeniably positive

Based on recent news, I think there’s certainly a chance the share price could continue rising — and potentially explode — over the next few weeks. The fact that it’s already up 6% in early trading today is certainly evidence that the market is getting excited over the company’s near-term outlook.

Even so, I’m less inclined than others to buy today. Based on my own risk tolerance, (long) investing horizon and the business itself, my preferred choice remains market leader Tesco. And if I were solely looking for income from the supermarket space, this real estate investment trust looks by far the least risky option to me.

Sainsbury’s shares jump 14% after takeover bid speculation

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Shares in Sainsbury’s shot up to the top of the FTSE 100 leaderboard today after speculation that Britain’s second-biggest supermarket was being circled by private equity predators.

Major American buyout group Apollo, which missed out on the takeover of Asda last year, is thought to be among the firms eyeing up Sainsbury’s, according to reports in The Sunday Times.

The news sent shares in the FTSE 100-listed grocer rising to their highest level in more than seven years today.

Takeover target: Sainsbury’s is reportedly being circled by private equity bidders

Shares hit 338p at one point today, the highest since March 2014. They were up 14 per cent, or 41p, to 336p shortly after the London stock market close.

The stock has had a good run over the past couple of years, having risen by around 75 per cent in the last 12 months and by 60 per cent since just before the start of the pandemic.

The rumours come amid a bidding frenzy for UK supermarkets. Last week, Morrisons agreed to a £7billion takeover by US private equity giant Clayton, Dubilier and Rice.

This gazumped an existing £6.7billion deal with a group called Fortress – although Fortress has indicated it could put in an even higher bid.

Shares in Morrisons were little changed at 291p, which is around 6p above the latest CD&R offer, suggesting that investors bet there is more to come.

Potential suitor Apollo last year missed out on a takeover of Asda, which was instead bought by billionaire petrol station tycoons the Issa brothers and their private equity backers for £6.8billion.

But it still remains in talks to join the Fortress-led consortium bidding for Morrisons and any involvement in that deal may preclude a move for Sainsbury’s, according to the report.

A swoop on Sainsbury’s could mean three of the ‘Big Four’ supermarkets - Tesco, Sainsbury’s, Morrisons and Asda - would be owned or joint-owned by private equity firms.

Sainsbury’s is now worth around £6.9billion, although many think it is undervalued. It has 189,000 employees and 1,400 stores.

Neil Wilson, an analyst at Markets.com, said: ‘Sainsbury’s is undeniably a good target for private equity with a considerable store estate, with the company having more than $10bn in property assets – more than its current market cap by decent margin.

‘The Argos tie-up is another long-term growth lever and provides further scale, while profits are on the up again in the wake of the pandemic, and net debt has come down.

‘It’s hard to beat those reliable cash flows – even without a big sale & leaseback plan the supermarkets are generating the kind of yield that is hard to get elsewhere.’

Why did Sainsbury’s shares just skyrocket 15%?

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Sainsbury’s (LON: SBRY) shares soared to a seven-year high on Monday (23 August)

The stock rally came on the back of reports that US investment group Apollo is interested in taking over the company

Last week, Morrisons, UK’s fourth largest supermarket, agreed to a £7 billion offer

Sainsbury’s shares are up by over 50% in 2021

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Sainsbury’s stock price: what’s the latest?

Sainsbury’s shares skyrocketed over 15% on Monday, following reports that several private equity funds are interested in acquiring majority stakes in the supermarket chain.

One of the funds, US investment group Apollo Global Management, is said to be the frontrunner of what is shaping up to be a bid war for the UK’s second largest supermarket chain, starting with a price tag of 7 billion pounds (US$9.53 billion).

Still, Apollo’s interest is ‘exploratory’, as it remains in talks to join fellow US investment firm Fortress Investment Group and other firms in bidding for Morrisons - the UK’s fourth largest supermarket group, The Sunday Times reported.

Last week, Morrisons agreed to a £7 billion bid proposal by US private equity giant Clayton, Dubilier and Rice. The Fortress-led consortium has since indicated it could offer a higher bid.

Thus, any further involvement by Apollo in that deal would mean the Sainsbury bid is off the table.

Despite the uncertainty, Sainsbury’s stock price hit a seven-year high of 341 pence at 14:00 (GMT+1) during the session.

These latest acquisition rumours about Sainsbury and Morrisons follow the sale of Asda, the country’s third largest supermarket chain, to EG Group and TDR Capital earlier this year. Apollo was a frontrunner in that deal but eventually lost out.

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How do analysts view Sainsbury’s?

For now, Sainsbury’s market capitalisation stands at over £7.9 billion, after having risen over 50% so far this year.

One analyst, however, believes the FTSE 100 stock is worth more.

‘Sainsbury’s is undeniably a good target for private equity with a considerable store estate, with the company having more than US$10 billion in property assets – more than its current market cap by decent margin,’ said Neil Wilson, an analyst at Markets.com.

‘The Argos tie-up is another long-term growth lever and provides further scale, while profits are on the up again in the wake of the pandemic, and net debt has come down.

‘It’s hard to beat those reliable cash flows – even without a big sale & leaseback plan the supermarkets are generating the kind of yield that is hard to get elsewhere,’ he added.