Over the past six months, the Sainsbury (LSE: SBRY) share price has delivered a healthy 32% return to investors. Expanding that to a year, the number rises to 63%. The Morrisons takeover news is partly to blame for this, as investors are now speculating whether Sainsbury’s could be the next target. If this were to be the case, the Sainsbury share price could explode.
The recent Morrisons takeover news has brought a new focus on the UK supermarket industry. US private equity firm CD&R were pitted against competitor Fortress in a bid to buy Morrisons. This helped drive the Morrisons share price to all-time high territory.
This has been good news for the wider industry, with Sainsbury and Tesco both seeing share price increases of 5% and 10% in the past month.
Is Sainsbury the next target?
The Sainsbury share price leaped 15% when markets opened on 23 August. This seemed to signal investors believed Sainsbury could be a viable acquisition opportunity.
Looking at the current value of Sainsbury shares I believe there is a case for this. Shares are currently sitting at 303p and trading off a price-to-sales (P/S) ratio of 0.24. Competitors Tesco and Morrisons trade off slightly higher P/S ratios of 0.34 and 0.40 respectively. Sainsbury’s shares seem to offer good value here, an appealing attribute for a theoretical acquirer.
Looking at market shares, Sainsbury holds 16% of the UK market. This is significantly below Tesco’s 27%, but also above Morrisons’ 10%. This places Sainsbury as the second-largest company in its market.
The enterprise value (EV) of Sainsbury is also encouraging for the acquisition case. EV is a measure of the market cap plus net debt. This is essentially a figure of how much you would need to pay to acquire the business. Sainsbury’s EV is currently $13bn, not far off of Morrisons’ £10bn. Tesco on the other hand currently boasts an EV of £31bn. With Fortress and CD&R having total assets under management of £35bn and £16bn, respectively, I couldn’t see either of them bidding for Tesco. This leaves Sainsbury as a much more viable choice.
Therefore, I think there is a case for the acquisition of Sainsbury. This would undoubtedly lead to an explosion of the Sainsbury share price.
The most recent results are likely to have helped the Sainsbury share price too. Total retail sales were up 7.3%, and digital sales up 102%, now combining to 42% of total orders. Online shopping has been amplified because of the pandemic, with many people now sticking to shopping online. The fact that this part of Sainsbury’s business is so strong gives me confidence for the future.
Overall, I think it is fair to say an acquisition is viable. This could lead to an increase in the Sainsbury share price. However, I don’t like to base my investments on theoretical events – I don’t want that risk for my portfolio. I still think Sainsbury could prove a good long-term investment, but I won’t be buying any shares today.
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Dylan Hood has no position in any shares mentioned above. The Motley Fool UK has recommended Morrisons. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.