Sainsbury’s (SBRY) is leading the FTSE 100 with a 2% gain this morning, following the news at the weekend that the supermarket is close to a takeover deal of Nisa Retail, a UK-based convenience store group.
Britain’s second-biggest supermarket chain is understood to have won a bidding war with the Co-operative Group for Nisa, according to The Sunday Times. Sainsbury’s bought Home Retail Group – which owns the Argos chain – in April 2016, in a £1.4 billion deal.
Sainsbury’s is reported to have offered a deal worth £130 million for Nisa, which has 2,900 stores and £1.3 billion in sales. Citing unnamed sources, the newspaper said that the mutual’s board decided to make Sainsbury’s the preferred bidder at the end of last week, even though Co-op matched and then offered to beat its rival "significantly".
Prior the announcement of this deal, UK supermarkets took a hit last Friday, after e-commerce giant Amazon (AMZN) announced its acquisition of US food retailer Whole Foods (WFM).
Tesco (TSCO) fell 4.4% on Friday – after it shares price had initially surged, following the announcement of better-than-expected sales figures. Meanwhile, Sainsbury’s dropped 3.9% and Marks & Spencer Group (MKS) fell 1.7%. Morrisons (MRW) also had a negative reaction, but took back its losses, ending up 0.6% on Friday.
Vinay Sharma, senior trader at ayondo, the online trading platform said: “The supermarket sector was rocked on Friday when internet giant Amazon announced a takeover deal of Whole Foods. But Sainsbury’s has bounced back today with news circulating about a potential takeover of cornershop Nisa.”
He added: “With Tesco previously making a similar bid for Booker, the sector is clearly consolidating and restructuring with consumer habits changing. Whilst this would be a nice coup for Sainsbury’s, the fact their share price hasn’t returned to the levels seen on Friday morning shows investors aren’t overly excited about the deal.”
Ocado Shares Rally 11% After Amazon’s Grocery Move
While many supermarkets fell on the back of the Amazon deal, shares in Ocado (OCDO) bucked this trend, with the online supermarket posting a sharp 11% gain on Monday, leading the UK mid-cap index FTSE 250. Analysts reckon that Ocado -- which is partnered with Morrisons and Waitrose - may become a takeover target, following the acquisition on Whole Foods by Amazon.
On June 16, Amazon announced its intentions to acquire Whole Foods Market in a $13.7 billion all-cash deal. Shares of Whole Foods Market soared 29.1% in the US at the market close last Friday, while Amazon was up 2.5%. Whole Foods Market is now rated as a two-star overvalued stock by Morningstar analysts, meaning analysts believe the stock is trading above its ‘fair value’ estimate.
Zain Akbari, Morningstar equity analyst said: “We portend this sale represents a favourable outcome for Whole Foods, in light of the intense competitive pressures that had been weighing on its business.
“Whole Foods has been under pressure to reignite its operations. These challenges were brought to the forefront following the 9% stake taken by activist investor Jana Partners earlier this year, as it petitioned the firm to make operational improvements and pursue a sale. We had believed that a sale also offered the best investor outcome.”
For Amazon, this deal could be advantageous as Whole Foods works to right its ship and drive efficiencies across its operations, said Akbari. This is because Amazon has developed a very powerful and disruptive brand that has become synonymous with competitive pricing, expedited shipping, and good customer service. Amazon dominates North American online retail with an estimated GMV of approximately $180 billion in 2016.
Will Margins Be Squeezed for US Grocers?
The companies most affected by this Amazon deal are US retailers and supermarkets. The US grocer Kroger (KR) was down 9.2% last Friday at market close, while Wal-Mart (WMT) fell 4.7%.
John Brick, an equity analyst at Morningstar says these share prices falls showed investors were concerned that competitive pressure in the grocery sector may intensify – with the added long-term threat of Amazon taking a significant position in that space. “We think a Whole Foods and Amazon tie-up could further exacerbate this pressure, as we expect Amazon to re-position Whole Foods more aggressively at lower average price points, leading to additional margin degradation in this space,” Brick adds.
However, Brick believes Wal-Mart is best positioned to survive this new competitive entrant and that its stock decline was least justified. He said that while this Whole Foods deal could eliminate “some of the physical footprint advantages that Wal-Mart holds” he points out that Wal-Mart still has around 4,700 stores in the US, compared to approximately 450 Whole Food outlets. And while Whole Foods stores only sell groceries, Wal-Mart offers a wider range of merchandise: from food to clothing to electrical goods. “Wal-Mart currently trades at a 10% discount to our $82 fair value, which remains in place,” said Brick.
