Sainsburys: A good leader in a bad place?

March 19, 2007

Predators advance on UK retailer J Sainsbury. The Private Equity army is on the march again. Commentators are already comparing the coming battle to the famous Green/Rose contests for Marks & Spencers. But who is playing the Philip Green role? Will Justin King star as Stuart Rose? Will leaders be seen as making any difference, or will the financials decide the ultimate fate of the retailer?

The City is expecting imminent news of a takeover bid for the retailer Sainsbury’s. Trading levels in its shares have been at roughly triple last year’s average levels over the last six weeks. Names such as KKR (if not Kohlberg Kravis Roberts) are becoming more familiar, even to folk who are not regular readers of financial blogs or pink newspapers. The UK takeover watchdog has set a deadline of April 13th for a formal bid by a consortium of four such financial hunters including KKR.

The BBC’s business editor Robert Peston is blogger and super-sleuth. He was ahead of the journalistic pack over the proposed Cadburys split earlier this week. And he takes an interesting line of the current Sainsbury story, finding parallels with Philip Green’s abortive bid for Marks & Spencers.

He points out that Green’s bid was heavily influenced by the M&S pension funding arrangements. The same now applies to any bid for Sainsbury’s. Peston shows that the critical pre-battle negotiations may be between the Private Equity consortium and the company’s pension fund trustees. He shows that the figures involved could be enough to hike the offer price beyond acceptable risk-limits, within a bid which would load debt on the company against its realizable (‘strippable’) assets. The point is a cogent one.

The Sainsbury story

John James Sainsbury and his wife Mary Ann opened a grocery story in Drury Lane London in 1869, and founded a dynasty which was to become the UK’s leading grocers

For much of the twentieth century Sainsbury’s was the market leader. Much of the credit in the years of growth occurred under the leadership of John Sainsbury. Its subsequent misfortunes took place under subsequent leadership, including his nephew David, and Peter Davis. Lord David was to quit industry retaining his political and charitable interests.

The decline of the group in the 1990s was during the spectacular ascent of Tesco. Then in 2003 it also dropped behind the Walmart-backed Asda, a marker that probably contributed to the boardroom moves in 2004 which saw the arrival of CEO Justin King, and Chairman Philip Hampton. Since their arrival, the company has initiated a range of moves to reverse its decline,

Justifying Justin

Leadership theorists (there are a still a few around) still acknowledge that there are uncertainties over how, when and to what degree a leader makes a difference in any specific situation. This justifies interest in new leadership stories, and in the search for comparisons with earlier cases. In the battles for Marks and Spencers, the story was as much as a clash of leadership wills as of financial ratios. M&S acted by bringing in a leader to help the company fight off the bid.

Sainsbury’s acted to bring in a strong leadership team in 2004 (or anyway, to replace a team considered to have been off the pace). Comparisons between Justin King and Stuart Rose were, perhaps, inevitable. Terms such as dynamic, youthful, able, well-qualified, appear in press reports. He ticked his CV boxes even including time spent at M&S, in his previous appointment, where he had been Director of Food. Since arriving at Sainsbury’s he has been active and visible in efforts to strengthen the company’s market position.

You can look at the progress of the company in two different ways. The company has reported modest but repeated growth in quarterly sales. Significant improvements have been made in logistics. Customers appear to like the affirmation of the company’s interests in supporting a healthy and ethical lifestyle.

But the killer facts remain. The supermarket chain that had held the number one position in the UK has dropped far behind beyond the mighty Tesco, and has failed to close the gap on second place to Asda. Even on his appointment, there were takeover rumours surrounding Sainsbury’s future. Allan Leighton, the current Royal Mail chairman was particularly mentioned. Coincidentally, Leighton was King’s mentor during their time at Asda. The rumours resurfaced recently.

On being a good leader in a bad place

In a leadership story, the company can’t play the move of switching from Justin King. Indeed we can make the case that Justin King was already brought in to Sainsbury in 2004, in a Rose-type move to protect the company from predators. Nor is it obvious what he might do to change the course of events once a bid has been made.

The King may rest uneasy, but on this analysis, it may be seen as a case of a good leader being stuck in a bad place.


Stefano Pessina: Friendly insider at Alliance Boots (update)

March 13, 2007

The friendly bid for Alliance Boots could hardly be friendlier. It is led by the company’s deputy chairman Stefano Pessina, in conjunction with private equity giant KKR. Friendly as in Cuckoo in the nest? (Updated).

Update

The Economist (March 17th 2007) examined the likely acquisition of Boots (as it described Alliance Boots). It noted the on-going debate on the merits of private-equity firms, pointing out that Boots was benefitting from effective management, and that the case for change was unconvincing.

It took its characteristic free-market stance to interpret the situation, accepting the story that Mr Pessina had been prompted to act by the sluggishness of performance post-merger. In short, Mr Pessina was not so much a cuckoo in the nest, as a rational agent responding to an entrepreneurial opportunity produced by sub-optimal performance. It added primly, that Mr Pessina might have been partly responsible in that he had failed in part of his well paid job to explain to the market its under-estimating of the value of the company …

My Earlier Post:

The leap in share price tells it all. This week the Alliance Boots pharmaceutical and health-care company was talking to itself. Part of the board considered a ‘friendly bid’ put together by the famed private equity company KKR. Another part of the board, led by its own deputy chairman Stephano Pessina, was spear heading the bid. The rest of the board faction has politely responded ‘thanks very much old friend, but do you think you could possibly find some more cash?’. The shares galloped up close to the proposed £10 level.

What’s going on?

Ambitious company insiders are increasingly aware of the potential of private equity support to mount a bid for ownership. The benefits of such a bid are obvious. The inside knowledge makes due diligence a rapid and relatively risk free process.

In this case, the historical events might almost have suggested that such a takeover was on the cards. It has been less than a year since Alliance Boots was created from the merger of health and beauty retailer Boots, and drugs wholesaler Alliance Unichem. After the merger, the new company retained a board strongly representing the somewhat larger Boots organisation, but with a curious-looking side-arm for deputy chairman Stephano Pessina.

Stephano Pessina

Although difficult to extract the information from the company’s official web-site, Stephano is a highly successful Milanese entrepreneur who in effect is the owner of Alliance Unichem, and thus, a thirty percent personal stake in Alliance Boots. He was the force behind the conversion of his family firm to an international organisation. A nuclear engineer by profession, he is believed to be disappointed at post-merger progress in the newly merged firm.

Cuckoo in the nest

The debate about private equity companies continues. Influential journalist and blogmeister Robert Peston of the BBC has been to the fore in bringing the debate to a wider audience. In simple terms, KKR is but one of a growing and influential group of financial consortia who have been developing innovative means of acquiring companies and capitalizing on their assets. (It is already in the news in the UK for part of a Consortium interested in the Sainsbury retailing organisation). Opponents of such firms portray them as asset strippers, impervious to human anguish and long-term social goals. Supporters argue that they rescue firms from flabby and ineffective management and return them to economic health. Examples of both kinds may be found. What is clear is that the ambitious entrepreneur within an organisation has a new way of seeking to achieve personal ambitions.


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