Wal-Mart's Asda weighs Sainsbury's bid

Asda, the UK supermarket owned by Wal-Mart, of the US, is considering entering the £10 billion race to buy its rival J Sainsbury and potentially disrupting an offer from a CVC-led private equity consortium that is scheduled to materialise within days.

It is understood that Asda is consulting with the Competition Commission over the potential antitrust issues that a combination of the two supermarkets would create, Reuters reports, citing two sources.

A tie-up between the two companies would pool together 1,104 stores and create a serious UK competitor to Tesco, which has 1,252 outlets in Britain.

Shares in Sainsbury's rose to 551p from 548.5p in early trading.

Asda was taken over by Wal-Mart in July 2000 for £6.7 billion, when the US company exceeded a bid from Kingfisher.

A consortium of private equity firms is believed to be close to making a 585p-a-share offer for Sainsbury's over the next week.

The Times revealed last month that CVC, Blackstone, KKR and Texas Pacific Group were examining a bid for Sainsbury's.

The group has until the end of next month to make a concrete offer after the Takeover Panel set a "put up or shut up" deadline for an offer.

A spokeswoman for Asda in the UK declined to comment to The Times on what she described as "market speculation".

The prospect of a trade buyer for Sainsbury's came as the highly regarded pensions expert John Ralfe dismissed recent claims by the grocer's pensions trustees as "sabre-rattling".

The Sainsbury's trustees argued at the end of last week that a prospective bidder for the supermarket could face a £3 billion funding shortfall in the scheme, which serves existing and former staff.

However, last week Sainsbury's was forced by the Takeover Panel to admit that the size of the pension deficit was closer to £1 billion.

Under IAS 19, the deficit is £410 million, but a private equity bid could increase the funding gap to £1 billion if Sainsbury's were forced to implement more conservative investment policies.

The move raised the prospect of bidders being asked to sweeten the price of an offer or commit to topping up the fund after a successful takeover.

Crucially, Sainsbury's fund trustees do not have the power to set the retailer's pension contributions — or demand that a private equity bidder accelerate payments into the fund.

This is unlike the case nearly three years ago when Permira, the private equity firm, dropped its bid for the retailer WH Smith after the fund trustees demanded extra payments as a condition of backing a deal.

This became known as the pension fund "poison pill".

But Mr Ralfe, the former head of corporate finance at Boots, who spearheaded the retailer's move into bond investments, said that the trustees were most likely trying to scare off private equity.

"The trustees must be seen to take a robustly consistent line to protect the interests of their 86,000 members if any bid becomes recommended, or if the company decides to increase its gearing," Mr Ralfe said in a note for RBC Capital Markets.

Mr Ralfe also runs his own independent pensions consultancy.

After last week's disclosure by the fund Trustees that the new terms for funding the pensions scheme would be "satisfactory", Mr Ralfe suggested that more clarity was needed.

"To maintain their moral high ground the Trustees should explain if the new funding agreement, now being finalised with Sainsbury's, is weaker than the current agreement," Mr Ralfe said.

He noted that the £3 billion deficit figure cited by the Sainsbury's trustees would arise only if the fund was passed to a third party insurer, if the supermarket group went bankrupt or if it put the scheme into wind-up.

The actual deficit for the fund is £477 million, as disclosed in the most recent annual report, he said.