The Big Sainsbury Short Takes Hit as Asda Deal Reboots Retailer

(Bloomberg) -- Short sellers including Marshall Wace LLP and GLG Partners LP face a hit after J Sainsbury Plc’s deal to buy Walmart Inc.’s Asda sent shares in the U.K. supermarket operator up the most in almost 30 years.

The grocery retailer’s planned tie-up with Asda, disclosed by Bloomberg News on Saturday, could create Britain’s biggest supermarket operator by market share, allowing the group to secure better deals from suppliers and bolstering its efforts to compete with online retailers. Walmart will take a 42 percent stake in Sainsbury and receive almost 3 billion pounds ($4.1 billion) in cash as part of the deal.

Sainsbury rose as much as 21 percent on Monday and was trading at 313 pence at 8:22 a.m. in London.

Short interest stood at about 14.4 percent of Sainsbury’s shares outstanding before the announcement, down from an annual high of 15.6 percent in January, according to data compiled by IHS Markit Ltd. The retailer had been the seventh most-popular short bet in the U.K., Financial Conduct Authority data show.

Rights Offering?

Short sellers, who sell borrowed shares aiming to buy them back at a lower price, have long targeted U.K. grocery retailers, betting that they don’t have the scale to compete with discounters. In February, Marshall Wace told investors that Sainsbury might need a rights offering as margins shrink amid the competition.

The hedge fund has since raised its position from just under 1 percent of outstanding shares to about 1.85 percent, or $151 million. GLG’s short position is valued at about $59.6 million. Marshall Wace declined to comment and GLG didn’t respond to calls and emails seeking comment. Sainsbury’s didn’t immediately respond to requests for comment.

Sainsbury’s Short SellersOutstanding Shares (Percent)
AQR Capital Management 0.80
BlackRock Investment Management (UK) 1.69
BNP Paribas 0.65
Citadel Advisors 0.64
Citadel Europe  1.36
Discovery Capital Management 0.58
GLG Partners 0.73
Marshall Wace 1.85
Odey Asset Management 0.79
Pelham Long/Short Master Fund 1.70
Source: FCA

The supermarket operator has expanded aggressively into convenience stores and is focused on the south of England around London, while Asda has more large supermarkets spread across the north. That geographical distribution limits store overlap and may make the deal more likely to be approved by the Competition and Markets Authority, said James Watson, a retail capital markets director at broker Colliers International Group Inc.

“It’s a really interesting move,” he said on Saturday. “If they did have to sell stores, it wouldn’t be many more than they want to close anyway” because of online sales. Sainsbury does not plan to close any stores, the firm said on Monday.

Property Sales

To bolster profits, U.K. supermarket groups have been selling real estate to investors and building homes and additional stores on some of their properties. Sainsbury’s real estate is valued at 10.3 billion pounds, according to the company’s 2017 annual report, compared with the firm’s 5.9 billion pounds market value on Friday.

Property entrepreneur Robert Tchenguiz tried to persuade Sainsbury to spin off its real estate in 2007. A fund backed by Qatar had offered to buy the retailer for more than 10 billion pounds after Tchenguiz pushed for the company to realize the value of the property portfolio. The failure of the Qatari bid, which pushed the firm’s shares to a peak of 600 pence in July 2007, left the country’s sovereign wealth fund as the supermarket operator’s biggest shareholder. Sainsbury closed at about 270 pence a share on Friday.

Sainsbury expects savings of at least 500 million pounds from the deal, according to Monday’s statement.

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