Sainsbury's Plans A Concrete Move To Take On Rivals

Supermarket Chain Sainsbury's has declared that it plans to enter into a joint venture with its largest landlord British Land and acquire a 50% stake in 39 stores including one Waitrose store. The deal is worth 1.2 billion pounds. At present all the 39 stores belong to British Land and have been leased back to Sainsbury's. Sainsbury's will need to put in 273 million pounds in the deal initially. The plan, according to chief executive of Sainsbury's, Justin King is to expand and develop 25 of those stores and cash in on any future increases in real estate rates.

This deal indicates Sainsbury's optimistic view of the future and its plans to go on the offensive could also be due to the fact that it needs more space for fulfilling increasing demand for its non food divisions like electrical items, electronics, especially flat screen TV's and clothing and to compete efficiently with competitors such as Asda and Tesco. Mr. King said that the off take of its non food items were 3 times more as compared to its grocery sales and that division was now selling products worth 300 million pounds per year. He also said that there were over 16.5 million customers who were not only spending money in Sainsbury's but also spending money in other stores every week, and he wanted those customers to spend more money with Sainsbury's. This joint venture is sure to hurt Robert Tchenguiz, a property magnate who has a 10% stake in the Sainsbury's after he had bought shares at an average rate of around 520p in the previous year and who has been clamoring the company's board to sell a majority of its real estate and lease it back to add value to the company and hopefully increase the share price, which were currently being traded at 348p. This has resulted in a loss on paper of around 300 million pounds for Mr. Tchenguiz. Two bids in the previous year at 600p per share, one from Delta Two and the other by an equity group CVC also failed to materialize. The supermarket chain's stock value is now worth less than 6 billion pounds but 286 of its most profitable freehold stores are valued at around 8.6 billion pounds.

Analysts seem to be happy with this move and according to James Anstead, analyst at Citigroup, that even though it seemed that Sainsbury's was doing the reverse of what was expected of them from the market, it seemed to be a good move in the long term and that both the parties would now have a shared interest in developing those stores. Sainsbury's has posted better results with like-for-like sales excluding fuel increasing by 4.1% in a 12 week period up to 22nd March, which were much higher than City expectations. Mr. King said that he had confidence in touching 480 million pounds in pre-tax profits for the current year, much in tune with market analysts' expectations. He said that even as customers were shopping more carefully, there were no indications of a downturn even as he admitted that the prices of milk, eggs, and bread and butter had risen enormously. Mr. King also dispelled rumors that the revival of its competitor Wm Morrison had eaten into their sales but reiterated that in fact that it was in the south that Sainsbury's had seen the fastest increasing sales and also hinted that it was not Sainsbury's which was bearing the brunt of Wm Morrison's increased sales but Tesco, which was paying the price. He added that even though there were pressures on the UK economy, he was optimistic about the future and would not pay any heed to doomsday predictions.

Mr. King seems to have taken a calculated gamble and even though he faces opposition from investors such as Mr. Tchenguiz, the results will not be immediately available and it seems that Mr. Tchenguiz will have to wait for some more time to see whether the share prices and the value of his investments rise or fall after the plan is implemented.

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Article written by: Craig Parker - Make Money Expert