Will Sainsbury’s share price soar like Morrisons after takeover rumours?

Sainsbury’s [SBRY.L] share price rallied last week on speculation that private equity firm Apollo Global Management [APO] is eyeing up a £7bn takeover of the supermarket. While news reports of the potential deal have caused a flurry, people familiar with the matter told Bloomberg that Apollo hasn’t held talks with Sainsbury’s or hired any advisers to navigate the deal. 

Should the story turn out to be more than just gossip, then Sainsbury’s share price could be put on a similar trajectory that of its peer. Morrisons’ [MRW.L] stock has seen a sustained upward trend over the past couple of months after a bidding war broke out for the grocer. 

What’s happening with Sainsbury’s share price?

Sainsbury’s share price has climbed by more than 37% since the start of January (as of 27 August). Sainsbury’s share price surged 9.3% on 23 August when news of a possible takeover emerged to trade at 340p but has since retreated slightly to close at 310.4p on 27 August.

Fellow grocer Morrisons saw its stock climb by more than 63% so far this year but really started flying off the shelves in June when it emerged that a consortium fronted by Fortress Investment Group was eyeing up the Bradford-based supermarket. This kicked off a bidding war for the supermarket against Clayton, Dubilier & Rice that has resulted in the Morrisons stock gaining almost 60% since 18 June.

Could Sainsbury’s share price see a bidding war?

Apollo had been in talks to join a consortium led by Fortress that was eyeing up a possible takeover of Morrisons. Should Apollo decide to pursue Sainsbury’s, then it would mean ending its association with the group. 

Clive Black at Shore Capital described the Apollo rumours as “not only sensationalist but quite shallow”, in a note to clients. Black suggests that the story is essentially a “rehash” after Apollo’s failed attempt to takeover Asda. 

“If Apollo does not participate in Morrisons future, then we cannot discount that the private equity group nor other mega-finance houses will consider looking at Sainsbury’s,” Black said in a note to clients. “Accordingly, expect real and made-up noise to continue.”  

UBS struck a similar tone on 27 August, when it downgraded their rating on Sainsbury’s to neutral from buy and described the Apollo discussions as “exploratory”. “We think a lack of statement from SBRY/Apollo suggests PE interest may have been exploratory,” said the UBS analysts.

UBS kept its 300p price target on the stock, a 3.3% downside on 27 August close, but it seems something more tangible will need to emerge for Sainsbury’s share price to go on a sustained run like Morrisons.  

Over at Morrisons, the supermarket agreed to a £7bn takeover from Clayton Dubilier & Rice after a fierce bidding war against fellow US private equity firm Fortress.

Where next?

Speculation over supermarket takeovers has come into focus as the sector continues to see improved trading.  

Sainsbury’s said sales growth for the first quarter came in ahead of expectations in a trading update covering the 16 weeks up to 26 June 2021. Total retail sales, excluding fuel, were up 1.6% year-on-year and 10.3% from the same period two years ago. Morrisons saw group like-for-like sales up 2.7% year-on-year in the first quarter and 8.7% compared to the same period two years ago.

For investors, the question is whether the recent rallies on both supermarkets have passed their peaks or if there is still any upside left in the stocks. If Fortress comes back with a counteroffer on Morrisons, then the share price could climb further. Likewise, if the Apollo discussions progress beyond exploratory, Sainsbury’s share price could spike yet again.

Among the analysts polled by the Financial Times, Sainsbury’s has an average 277p price target, which would see a 10.7% downside on 27 August close.  Morrisons has an average price target of 254p, representing a 12.6% upside if hit.