Tesco and Sainsbury in play after Morrisons bid – broker

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Tesco PLC (LON:TSCO) and J Sainsbury PLC (LON:SBRY) shares are going to see more interest from investors and short-sellers after the rebuffed private equity bid for Morrisons, according to analysts at broker Short Capital.

“For some ‘shorters’, further bid activity may lead to an abrupt exit and so a short squeeze so to speak, that could elevate the respective share prices,” said Shore Cap’s Clive Black and Darren Shirley in a note on Monday morning.

READ: Are petrol stations the key to a potential Morrisons takeover?

But for other hedge funds with strong convictions, the rising Sainsbury and Tesco share prices “may lead to new and/or renewed short interest”, the pair added.

They noted that if equity markets do not appropriately value shares there would be interest from other forms of capital, as seen with the Asda takeover, the approach for Carrefour, and the investment in Sainsbury by Czech billionaire Daniel Kretinsky, who also has sought to buy German wholesaler Metro AG.

The analysts said that even Tesco, valued at £18bn, “is not too big to be subject to an offer”.

Alluding to the long-mooted question in the grocery sector of whether Amazon would bid for one of the big UK supermarkets, the Shore Cap analysts said a bid for Sainsbury would be “unlikely” as it would be subject to UK regulatory influence because of its ownership of Argos in the online non-food arena.

As for Tesco, “it is difficult to see how an approach for say Tesco by Amazon could be refused by the British competition authorities”, the pair said.

Either way, the Asda takeover, Morrisons bid and Kretinsky investment at Sainsbury means that the topic of Amazon’s plans will be part of “ongoing discussion around Sainsbury and Tesco here on”.

Shore Capital noted that the pair should be of interest for their “fundamentally improved business economics”, not just their liquidity and low equity multiples.

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