Sainsbury’s shares rise on market speculation after private equity swoops for rival Morrisons

Shares of British grocery chain Sainsbury’s rose Monday after U.S. private equity firm Clayton, Dubilier & Rice narrowly won an auction for domestic rival Morrisons.

CD&R’s £7.1 billion ($9.65 billion) bid, valuing Morrisons at 287 pence per share, edged out a rival offer of 286 pence per share from Softbank-backed Fortress Investment Group.

The winning bid was only 2 pence per share more than the original offer tabled in August, which led Morrisons shares to slide 3.7% on Monday.

Morrisons’ board is recommending that shareholders accept the CD&R offer, with a vote scheduled for Oct. 19. The deal means a return to the U.K. grocery sector for former Tesco CEO Terry Leahy, who is now a senior advisor to CD&R.

“That price sounds steep but is a reflection of the significant growth opportunities ahead. In particular, the supply and delivery partnerships with Amazon will have caught the attention of potential buyers,” said Sophie Lund-Yates, equity analyst at U.K. online investment platform Hargreaves Lansdown.

“As a bit of an underdog in the U.K. grocery market, Morrisons makes sense as a potential target – especially when you consider the majority of its stores are owned, not leased, giving the group an impressive asset collection and healthier balance sheet.”

Saturday’s auction brought to an end a bidding war between the two U.S.-based investment groups that had rumbled on since June, and analysts now expect Fortress to size up other British grocery chains as possible alternatives. Sainsbury’s shares were up 3.7% by early afternoon on Monday.

“Fortress are clearly interested in what the U.K. has to offer, and a boom in private equity activity in London this year means they won’t be the only ones,” Lund-Yates said.

“A weak pound and low interest rates mean U.K. companies could look more enticing now than they have in a while, and further offers for U.K. businesses can’t be ruled out.”

Private equity activity in the U.K. jumped to its highest level since 2017 in the first half of the year, according to analysis from KPMG, with 377 deals being signed at a combined value of £20.7 billion.

“Fortress, which was unlucky in the Morrisons bid, is seen to be eager to make a large transaction, so one must wonder if Sainsbury’s is the next logical business to tick all the right boxes for the U.S. dealmaker,” said Russ Mould, investment director at fellow British online stockbroker AJ Bell.

Sainsbury’s declined to comment on speculation, while Fortress did not immediately respond to CNBC’s request for comment.

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