On the surface, the sale of Asda from one part of US grocery giant Wal-Mart to another is no big deal – it’s just a financial tidying-up exercise. But investors in the sector should pay attention – because the price tag that Wal-Mart has attached to Asda makes one of its rivals look very cheap indeed.
Asda is Britain’s number-two supermarket chain. Following the sale, it is now the property of one of Wal-Mart’s subsidiaries, rather than the parent company itself. The deal was done for “good financial management” reasons. In other words it must now suit Wal-Mart’s book to rearrange its investments, probably for tax purposes.
The £6.9bn price tag was calculated on a “historic book value” basis, according to Asda. And it’s probably fair to guess that it was pretty conservative. As The Telegraph points out, £6.9bn is just £220m more than Wal-Mart shelled out for Asda ten years ago.
But it’s not so often that you get told about an ‘external’, i.e. non-stock market, valuation of such a large, stand-alone business. That makes it pretty handy for comparison purposes.
Let’s see. Asda’s 2008 annual revenue was £18.6bn. So the transfer was done at a historic price/sales ratio of 0.37 (with this measure, the lower the figure is, the cheaper the company). If you compare this with Tesco (LSE: TSCO) on a p/s multiple of 0.62 and Wm Morrison (LSE: MRW) on 0.52, then £6.9bn appears to be a pretty conservative view of Asda’s worth.
But look at the fourth of Britain’s big four food retailers (though it’s actually vying for second place in turnover terms behind Tesco). That’s J Sainsbury (LSE: SBRY), which we tipped this last month.
This is a company currently valued by the stock market at less than a third of last year’s sales. So even if the valuation merely moved into line with that Asda price, then Sainsbury’s shares would climb from their current 332p a share to 382p. As for book values, Sainsbury’s again looks the cheapest on a multiple of just 1.3 times its net asset value, compared with 1.7 for Morrison and 2.5 for Tesco.
Of course, none of this means its shares must go up. But there’s been a recent revival of bid talk at upwards of 400p a share – and on the grocer’s current valuation, it’s not hard to see why. It should pay to stick with Sainbury’s.