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Food for thought on a Sainsbury buyout

By Camilla Palladino

www.breakingviews.com

Investors in ailing UK supermarket chain

J Sainsbury seem to be hoping a private-equity bidder will ride to their rescue if new CEO Justin King fails to turn the business around as he has promised. But could such a bidder make the numbers stack up?

It's possible but it would be a big stretch. The major difficulty with Sainsbury is its size. The group's market capitalization is £4.6 billion, and any bidder would also have to assume £1.8 billion of net debt. Chuck in a 30% premium for the equity, and the group would cost £7.8 billion. That's a huge mouthful for any private-equity bidder.

What's more, it wouldn't be possible to gear Sainsbury right up to the eyeballs. The group might be able to borrow £3 billion against its freehold and long-leasehold stores, assuming it sold them for the same value that British Land, a listed property company, places on similar properties on its books. And it could perhaps borrow a further £2 billion against its operating cashflows, assuming it cut capital expenditure sharply.

A stub equity solution

But even if a bidder raised £5 billion of debt, that would still leave it with £2.8

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