Bloomberg News

Sainsbury Property Split Would Risk Margins, UBS Says

April 16, 2007

J Sainsbury Plc (SBRY), the U.K.'s third- largest supermarket company, may have lower profit margins and suffer more from competitors' price cuts if the retailer's property was split off, UBS AG said.

``The Sainsbury operating company would generate very low EBIT margins under a leasehold structure'' while the company's recovery plan is under way, UBS analysts including Lucy Sharma, referring to earnings before interest and tax, wrote in a note to investors today.

Leasing property would make the company ``vulnerable to aggressive discounting by peers,'' Sharma wrote. UBS values Sainsbury's property at 7.6 billion pounds ($15.1 billion).

Robert Tchenguiz, a billionaire U.K. investor who holds 5.1 percent of London-based Sainsbury, wants more than 4 billion pounds returned to shareholders by splitting the retailer into operating and property units, the Sunday Times said yesterday. Under his plan, the company would increase debt to 6 billion pounds from 1.6 billion pounds by borrowing against the value of the real estate, the newspaper said, without citing anyone.

Sainsbury shares fell 1 pence to 533 pence in London today. The stock is still 19 percent higher than it was on Feb. 1, the day before a group of buyout firms led by CVC Capital Partners said it may bid for the company.

CVC scrapped its 10 billion-pound offer when partners Blackstone Group LP, Texas Pacific Group and Kohlberg Kravis Roberts & Co. abandoned the buyout firm and the members of Sainsbury's founding family held out for a higher offer.

John Sainsbury, whose family owns an 18 percent stake, said the retailer needed to avoid debt and keep its real estate.

`Improving' Performance

Sainsbury, which ranks behind Wal-Mart Inc.'s Asda and Tesco Plc, spurned the bid after saying performance was ``improving'' and it intended to complete a recovery plan. Chief Executive Officer Justin King has clawed back market share from Tesco by cutting prices and distribution to ensure better availability.

The company's strategy ``is delivering impressive market share gains'' and is unlikely to change soon, Sharma wrote in UBS's note. She has a ``neutral'' rating on the shares.

Sainsbury already rents 40 percent of its space, a higher proportion than any of its principal competitors, Ching Mei Chia, European retail analyst for Fitch Ratings, said April 13.

Raising money from sale-and-leaseback transactions ``would further strain its profit margins and financial performance'' because of additional rental payments, Chia said.

A separate Sainsbury property company could choose to lease sites to other food retailers that could afford higher rent, the UBS note said.

UBS raised its price target on Sainsbury shares to 540 pence from 420 pence today. The bank cited the value of the property and expects the retailer's profit margins on earnings before interest and tax will increase over the next 3 years.

To contact the reporter on this story: Amy Wilson in London at

To contact the editor responsible for this story: Keith Campbell at

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