Sainsbury's Shares Up 14% Amid Media Speculation on Private Equity Interest; FVE Maintained

According to the Sunday Times, private equity companies are taking an exploratory look at Sainsbury's, with Apollo specifically named in the article as one of the players interested in the supermarket industry. Apollo is not foreign to the United Kingdom grocery segment, as it was previously outbid for Asda, which ended up being acquired by private equity firm TDR Capital and Issa brothers (deal closed in February 2021). It is also reported (according to the same article) to be considering joining Fortress Group in its bidding for Morrisons (see our previous notes). At the time of writing, Sainsbury's shares are trading up as high as 14% at about GBX 335.00 per share and into 2-star territory (from 3-stars before the release of the article). We maintain our GBX 262.00 fair value estimate as we opt not to include a potential acquisition of the grocer/privatization in our base-case scenario. Despite the fact that our thesis on the grocery segment (large, multichannel players that are best-positioned online) has been constructive since the coronavirus pandemic erupted and we favored Sainsbury's as the only grocer in our list with the best combination of market position/outlook and valuation support, shares have outperformed year to date (up about 50% including the Aug. 23 price action versus up less than 20% for a group of European grocers we follow, excluding Morrisons), and thus we would advise investors to wait for a better entry point.