Petrodollar flush

6 October 2007

The Gulf states are competing for prestigious Western investments, say Jon Ashworth and Allister Heath

Nowhere has the power of the newly-ascendant petro-sheikhs been more clearly demonstrated than in the Gulf’s pursuit of J Sainsbury. Last week, its board finally agreed to open the books to Delta Two, the Qatari investment vehicle that has tabled an indicative £10.6bn offer for the supermarket group. The cash offer values Sainsbury’s at 600p per share, at the top end of the earlier, failed tilt by a CVC-led private equity consortium.

Sainsbury’s agreed to open its books after Delta Two bowed to demands from the board and the Sainsbury family to reduce the amount of debt in the bid. The Sainsburys own 18% of the shares; winning them over is crucial. Delta, fronted by Paul Taylor, has pledged £3.5bn of capital investment over five years to fund new store expansion, refurbishments and further development of Sainsbury’s non-food offering.

The gush of Gulf petrodollars into Sainsbury’s aisles would delight Justin King, the store group’s chief executive, who has stuck to his theme of steady investment throughout the distraction of this year’s takeover overtures. His strategy is working; Sainsbury’s pre-tax profits in the year to end-March increased 42% to £380m on sales up 6.9% at £18.5bn. The company has achieved nine quarters of consecutive like-for-like sales growth.

It was the success of the King-orchestrated turnaround that helped convince the Sainsbury family to hold out against the CVC-led bid. Gulf petrodollars may prove more robust than the fickle attentions of private equity, fuelled at the time by cheap credit that has now evaporated. Tony Campbell, former deputy chief executive of Asda (where King previously worked) will replace Sir Philip Hampton as chairman of Sainsbury’s if the Qatari bid succeeds.