During the Bank Holiday weekend, Sky News revealed that Sainsbury’s (SBRY) is in discussions with US private equity group Centerbridge to dispose of its banking arm with a mooted price of £200 million.
Despite the speculation the share price drifted marginally lower on 31 August, losing 1.1% to 307p. This appears to be at odds with the potential for a disposal of a non-core business that would make strategic sense.
WHY A DISPOSAL MAKES SENSE
The performance of the bank has been disappointing. This is despite a considerable investment of over £1.5 billion in what has been a misguided aspiration to become a challenger bank. Scale is a key determinant of success within the UK financial services sector.
Both Tesco (TSCO) and Sainsbury’s have failed to gain critical mass with respect to their financial services divisions, and both have had to reassess their ambitions.
RENEWED FOCUS
The divestiture of Sainsbury Bank would provide management with greater flexibility to focus on its two key strategic priorities. The first being the enhancement of the group’s core food offering. There have been some encouraging recent indications that an improvement is already taking place.
There has been a marked improvement in the performance of the group’s retail labels in recent quarters which has prompted sell side analysts to repeatedly upgrade their earnings forecasts for the group.
The second strategic priority for management involves the restructuring of Argos. This could act as a catalyst for both value creation and a re-rating of the shares.
EXPERT'S VIEW
Shore capital retail analyst Clive Black believes that Sainsbury has the potential to become a cash compounder. Black commented: ‘With capital discipline, ongoing tight cost control, we see a Sainsbury equity that can deliver strong well covered dividend streams and the prospect in time of special distributions too.
‘If Sainsbury remains independent, therefore, there remains the prospect as a cash compounder with further rating expansion in time.’
