After Morrisons gave the nod to the latest £7bn takeover offer, investors have been wondering who’s next. The finger quickly pointed in the direction of Sainsbury (LSE: SBRY). When the market opened the Monday after the Morrisons announcement, the Sainsbury share price took off, ending the day 15% ahead.
Since then, it’s dropped back a bit, losing 5% in a couple of days. Does that mean takeover speculation has moved on and it’s one to avoid? Or is it a chance to get in on a buyout possibility at a bit less than the immediate spike price?
Well, I do reckon FTSE 100 shares in general are undervalued right now. I think it shows when we compare the top index’s underperformance to the FTSE 250 over the past decade and more. The battle for Morrisons indicates something else too.
We saw two private equity firms slugging it out for control. Clayton, Dubilier & Rice appear to have won the battle, but it comes at a price that’s way above Morrisons’ pre-bidding valuation. Offering such a hefty sum was needed, with rival Fortress close behind in the race.
Cash to invest
What it does suggest is that these private equity firms have plenty of cash to invest. And they’re prepared to pay premium prices to get their hands on the top pickings among our UK groceries businesses. Saying that though, the Sainsbury share price has been doing better than Morrisons’ over the past 12 months.
Morrisons just hadn’t started recovering from its 2020 depths yet, while Sainsbury was already on the way up. Today, SBRY shares have risen further than MRW, even taking into account today’s takeover-elevated MRW share price. That suggests to me the appetite for making a seriously over-market bid for Sainsbury might just not be there.
Buy for takeover
So, would I buy Sainsbury in the hope of a takeover giving me a quick profit? No, I wouldn’t. At least, I wouldn’t invest in Sainsbury, or any other company, for that reason. No, I only ever invest in a company if I’d be happy to keep it as an independent entity for at least the next 10 years.
So does Sainsbury satisfy that requirement? For me, it’s a qualified yes. For the year ended March, the firm restored its dividend, which had been held back in 2020 in the early days of the pandemic. The statement told us that’s “reflecting strong cash generation and consistent with our commitment to protect shareholder income from the full impact of COVID-19 on profits.”
Sainsbury share price valuation
The 10.6p per share means a yield of 3.3% on the current Sainsbury share price. And I think that’s probably about right for the sector, considering its long-term income record. What happens when we finally get back to full post-pandemic shopping remains to be seen. Sainsbury is reasonably upbeat, if a little cautious, over its outlook for 2021/22.
Will I buy, then? No. I do think I’m seeing fair value from a company I’d keep for the long term. But if I invested in a supermarket, it would be sector leader Tesco. Even without the likelihood of a takeover.