Sainsbury's is on the attack with £445m

Simon English
17.06.09

J Sainsbury today unveiled an aggressive expansion plan as the fight for supermarket supremacy moved up a gear.

It raised £432 million from the City to fund an attack on Tesco, Asda and the rest which will see it acquire 15% more floor space by 2011.

Sainsbury's is looking to take advantage of the weak property market to snap up rival stores that it can rebrand and to acquire land from developers looking for cash.

The move is the latest stage in chief executive Justin King's attempts to revolutionise a company that had badly lost its way when he arrived five years ago.

Last month Sainsbury's recorded profits for the year of £543 million, a rise of 11%.

King said he was encouraged by shareholders who were pleased with these results to ditch the financial caution of the past few years and go for growth.

“It was clear to us given the response from shareholders that they felt it was time to push forward. It is time to get rid of our self-imposed capital constraints,” he said.

Sainsbury's raised £242 million from a placing of new shares at 310p and another £190 million from a convertible bond.

UBS and Morgan Stanley took fees running into the millions for arranging the deals. The exact amount was not disclosed today.

The shares fell 12½p to 319¼p.

King, paid £5 million in cash and shares this year as reward for his performance, was today able to unveil his 18th consecutive quarter of growth.

Like-for-like sales, which strip out the effect of new store openings, rose 7.8% in the 12 weeks to 13 June.

That's well ahead of the 3.3% growth reported by Tesco yesterday, though in terms of market share Sainsbury's is still a long way behind.

Tesco controls 30% of the UK grocery market, Asda and Sainsbury's have roughly 17% each, while Wm Morrison has around 12%.

Analysts at JPMorgan said: “For the first time in many years, Sainsbury's is set to grow its space faster than Tesco's in percentage terms.

“Sainsbury's is perhaps in the position where Tesco was five to 10 years ago with a strong balance sheet and plans in place to grow into non-food and convenience aggressively.

“We believe Morrisons is in the same position to accelerate expansion. This is not good news for Tesco, in our view, which is finding it hard to increase its household penetration.”

Sainsbury's today bought nine stores from the Co-op in a sign of its intent. It had already acquired 24 stores from the Co-op this year.

King dismissed fears that the supermarket industry is becoming too powerful and that its market power kills smaller competitors.

“It is a view often expressed. But the reason we are expanding is because we have been doing a fantastic job for customers,” he said.

“You should see my postbag. I get letters from people saying please come to our town. They are delighted to have a quality supermarket.”

King claims the arrival of a new Sainsbury's actually helps generate sales for nearby retailers, something the small business lobby would dispute.

Unlike other recent fundraising deals by large companies, Sainsbury's will not be using the money to pay down any of its £1.7 billion of debt.

Analysts suggest this is another sign of the green shoots economists have been seeking as they look to call an end to the downturn.

King was more cautious, saying he still expects the rest of the year to be tough as customers fret about possible job losses.

There has been gossip in the City that the Qatari royal family, which has a 25% stake in Sainsbury's, might look to ditch this holding.

The Qataris launched a £10 billion takeover bid for the company two years ago, but was unable to get the support of the board.

Sainsbury's is presently valued at less than £6 billion by the stock market.