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Visionary Thinking

UNEXPECTED COMPANIES IN THE BAGGING AREA?

“The UK is going to remain of interest so long as interest rates remain low, and there is lots of liquidity available.”

After Morrisons PE-funded acquisition which UK retailers could be next?

Back in 2006 – in the days of its pomp and glory – Tesco, then the third biggest retailer on the planet, tried to conquer the US grocery market. But now – according to Proactive Investors – “there is growing speculation it could end up in US hands.”

With the recent triumph of US private equity giant Clayton, Dubilier & Rice in its £7 billion takeover of Morrisons, many industry commentators are openly wondering if Tesco or Sainsbury’s might be next.

Interestingly, Sir Terry Leahy, the former boss of Tesco was one of the senior advisers to CD&R funds on the Morrisons deal. At the time, Leahy commented, “We very much look forward to working with the Morrisons team, not just to preserve the company’s many strengths – but to build on these, with innovation, capital and new technology.”

Given Leahy’s involvement, it is hard to imagine CD&R did not at least discuss the possibility of a move for Tesco before plumping for the West Yorkshire retailer.

And, in The Grocer, AllianceBernstein equity analyst William Woods firmly placed Tesco ahead of Sainsbury’s, as the most enticing stateside PE acquisition: “The Tesco business is attractive for private equity investors, the turnaround is complete, the business is simplified, diversified and dominant, and the next five years are set to be a story of consistent, strong execution and returning to shareholders.”

Proactive Investors go on to quote Shore Capital’s analyst Clive Black, “The UK is going to remain of interest so long as interest rates remain low, and there is lots of liquidity available.”

So, with sterling already weak, historically low interest rates could play a further part in enabling US funds to capture Tesco.

For the time being then, significant financial factors seem to be conspiring to put the UK’s retail crown jewels on special offer.

In the case of Tesco, the supermarket giants’ £21.5bn market cap might still prove too big for even the largest PE fund to swallow. But Sainsbury’s, Ocado and even M&S may find themselves unexpectedly placed in the bagging area.

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