Improved Sainsbury offer expected

Qatari-backed investment fund Delta Two could be set to raise the cash stake in its 10.6 billion British pounds ($21.2 billion) takeover bid for UK supermarket giant Sainsbury as early as this week.

Delta Two’s new offer is expected to include a higher cash portion between 500 million to 800 million pounds, bettering July’s original offer of 3.1 billion pounds in equity, 1.5 billion pounds in “payment-in-kind” notes and 6 billion pounds in debt, UK weekly The Independent on Sunday reported today.

“There is a good chance that a revised offer will be made in the next seven days,” a banker close to the talks told the newspaper. “However, there are other factors, other than the amount of cash in the bid, that will decide the outcome of negotiations.”

The comments follow a report in British daily The Financial Times last week that Delta Two had offered to increase the equity proportion in its takeover bid by as much as 1 billion pounds.

Negotiations between Delta Two and Sainsbury had been stalling till a breakthrough was made following two meetings last week between the two sides’ chief executives. Only if Sainsbury’s board is satisfied that Delta Two has financing in place and can meet the concerns of the retailer’s pension fund trustees will the company recommend an offer to shareholders.

One source close to Sainsbury told UK weekly The Sunday Times that if Delta Two, owned by the government of Qatar, did not making an offer soon it ran the risk of Sainsbury's board issuing a “put up or shut up” order.

“CVC [which led a private-equity consortium that bid for Sainsbury in March] was given four weeks,” said the source to the newspaper. “The board has been extraordinarily generous with time in this case, and they are getting into the territory where they will have to consider a ‘put up or shut up’ order.”

Regulatory scrutiny expected

If Delta Two makes a revised bid this week, which then gains the approval of Sainsbury’s board, the competition watchdog may investigate whether the amount of debt on the Sainsbury’s books affects its competitive position against rivals like Tesco.

The Sainsbury family, who have an 18% stake in the company, are opposed to the Delta Two bid as it stands today, believing the supermarket chain could be saddled with too much debt from the deal.

The family’s support is essential for Delta Two as it needs the backing of 75% of investors for any offer to be approved.

The recent turmoil in credit markets has only further fuelled concerns over the amount of debt Delta Two has to raise to fund its takeover offer.

The fund on July 19 submitted letters from three banks - ABN Amro, Credit Suisse and Dresdner Kleinwort - which stated that the debt financing was in place. All three backers remain committed to the bid despite the global credit crunch, according to the fund.

Markets are also keeping a close eye on the Sainsbury deal, as it is one the only large leveraged deals still in process in the battered loan market, and thus an indicator of how strong the markets themselves are.

“If this deal isn’t completed, it will be a very negative sign of market conditions and confidence,” one commentator told The Sunday Times.