Is Tesco the next private equity takeover target? Grocery store is ‘most attractive’, City analysts claim
- Wealth management giant Alliance Bernstein said the supermarket was the ‘top choice’ for a takeover as Tesco shares are cheaper than UK rivals
- Bernstein believes Tesco has tightened its ‘dominant’ UK market, after selling businesses in Asia and Poland, leaving the company ‘leaner and more focused’
- The ‘strong retail domain’ is also supported by strong own-brand products and a successful loyalty program with Clubcard
Tesco could be swallowed up by private equity despite its massive £19.8bn valuation, analysts say.
In a note to customers, asset management giant Alliance Bernstein said the supermarket – led by CEO Ken Murphy – was the “top pick” for a takeover, as its shares are cheaper than British rivals and it has completed a turnaround under former boss Dave Lewis.
Bernstein believes Tesco has tightened its ‘dominant’ UK market, following the sale of businesses in Asia and Poland, making the company ‘leaner and more focused’. The ‘strong retail domain’ is also supported by strong own-brand products and a successful loyalty program with Clubcard.
Target?: Alliance Bernstein said the supermarket – led by chief executive Ken Murphy (pictured) – was the ‘top pick’ for a takeover, as its shares are cheaper than British rivals
William Woods, an equity analyst specializing in the European food sector at Bernstein, said: “We think this is the most attractive at a fundamental level. The turnaround is complete, the company is simplified, diversified and dominant, and the next five years will be a story of consistent, strong execution and return to shareholders. Tesco’s online sales now amount to £4.5-5 billion and are profitable, driven by scale and operational excellence, and further asset sales are possible.”
Retail expert Andrew Busby added: ‘If the appetite is big enough, it’s’ [a private equity takeover] would make a lot of sense. If you look at the top four, we know what happened to Asda, there’s talk of Morrisons and I wouldn’t touch Sainsbury’s with a barge, so that leaves only Tesco.’
A sale of Britain’s largest supermarket to private equity would permanently change the landscape of UK supermarket buying, affecting around 20 million customers and thousands of suppliers.
The size of a potential deal would make it one of the largest private equity takeovers in UK corporate history.
Only a handful of the world’s largest private equity firms, such as Blackstone, KKR and CVC, would have the firepower to fund such a move.
A leveraged deal would normally require between £2bn and £6bn in cash to take the food giant private, with a potential deal set alongside the monster buyouts of Alliance Boots in 2014 (£10.9bn) and Cadbury in 2010 (£11.9 billion). Tesco also has a pension deficit of £1.2bn, as opposed to Morrisons’ £760m surplus.
Private equity has invaded the undervalued UK supermarkets, meaning Sainsbury’s and Tesco will soon be the only remaining listed supermarkets.
Shares in Sainsbury’s rose 15 percent last week, however, following rumors that US company Apollo was considering an offer, although the risks surrounding Argos and banking activities are considered enough to deter suitors.