Breakingviews – Czech billionaire’s supermarket raid looks pricey

LONDON (Reuters Breakingviews) – Daniel Kretinsky seems to be hoping that supermarkets’ pandemic boost will endure. The Czech billionaire has raised his stake in UK grocer J Sainsbury to nearly 10%, prompting speculation of a full takeover. Yet stubbornly high costs and increasing competition after lockdowns would make it difficult for him to deliver a respectable return.

Kretinsky has already done well out of his bet on Sainsbury’s. The entrepreneur, known for snapping up stakes in business such as Royal Mail or France’s Casino at depressed levels, bought shares in the 5.4 billion pound grocer last September, when the stock was languishing at around 179 pence. It has since increased by over 30%, thanks to shoppers cranking up purchases during lockdown.

A takeover isn’t totally implausible. In 2019, Kretinsky partnered with Slovak investor Patrik Tkac to try to buy German cash and carry operator Metro for $6 billion. Still, it’s an odd time to make a big splurge on supermarkets. As restaurants and bars re-open, punters are likely to reduce their weekly shopping bill, hurting revenue. Competition from discounters Aldi and Lidl, who stopped taking market share during the pandemic due to a weaker online presence, is likely to step up again. And operating costs may stay high due to the need to keep shelves virus-free. All that means it may be hard for Kretinsky to substantially grow Sainsbury’s revenue or boost its profitability.

Assume Kretinsky were to offer 288 pence per share, a 20% premium to today’s stock value, valuing Sainsbury’s at 12.5 billion pounds including net debt and leases. If he grows revenue by around 1.5% over five years, in line with Refinitiv forecasts, and maintains a margin of around 7.5%, then EBITDA could reach 2.3 billion pounds. An exit on the same roughly 6 times multiple would generate a modest 11% internal rate of return, according to a Breakingviews calculation. That assumes Kretinsky funds his deal with debt equivalent to 3 times EBITDA and uses 30% of EBITDA each year to pay down debt.

Alternatively, Kretinsky may just be topping up his stake. But Sainsbury’s shares are now trading some 22% above their level even before the pandemic. Having struck a good deal last year, Kretinsky may now need to look elsewhere for more bargains.