The Sainsbury’s (LSE: SBRY) The share price experienced a phenomenal run in 2021. While many supermarket stocks have fallen behind the market, Sainsbury’s share price has risen nearly 30% for the year and approaching multi-year summits. The biggest one-day gain came in August, when stocks jumped more than 15% on news of a buyback. Since then, the market has cooled and reversed some of those gains. So, could this be the perfect opportunity to step into that FTSE 100 title?
The news of the repurchase
Speculation over a Sainsbury’s takeover began in April when billionaire Daniel Kretinsky increased his stake in the company to 10%. Such a high level of ownership is a massive clue to the market that a takeover or a change in management will occur. This change sparked investor enthusiasm and was the catalyst for a sharp rise in the share price.
Recently, the supermarket chain sparked more interest when Fortress Investment Group offered £ 6.7 billion to buy it. With a 52% premium to the stock price, it’s no surprise that investors are impatient and the stock price has jumped. Clayton, Dubilier & Rice, a private equity firm, then upgraded that offer to £ 7 billion for the company.
With so much interest in the FTSE 100 component, seeing the stock price perform so well this year is not surprising. In addition, it is also possible that another company will increase the value of the transaction again. In this case, the share price would likely rise again, rewarding investors.
Beware of dangers
If it is possible that a new business will raise the auction, it could also collapse. A takeover candidate may be cold in the eyes of the supermarket industry or need the capital for other reasons. Based on my calculations, investors rate the odds of a takeover at 98%, which tells me that investors are incredibly confident or expect another increase. If the deal fails, the stock price could fall back to pre-2021 levels, down 25%.
There are other risks associated with owning Sainsbury’s shares. In a previous article on another FTSE 100 member Tesco, I mentioned the rise of competition in the purchasing market and the negative effects of the reopening of the economy. There is also a nationwide CO2 shortage affecting supermarkets. The repercussions of this shortage are that the frozen food and meat shelves, which are heavily dependent on food grade CO2, are quickly running out. Without immediate government action this could go on for months and Sainsbury’s revenue figures could suffer.
At the end of the line
The announcement of a Sainsbury’s takeover will likely be the main factor driving the share price over the next 12 months. If another company increases the buyout offer, Sainsbury’s stock price is likely to experience another huge run. On the other hand, investors are likely to see a significant drop if trades fail. Right now I’m sitting on the sidelines waiting for more news on the subject.
Harry Godfrey has no position in any of the stocks mentioned. The Motley Fool UK recommended Tesco. The opinions expressed on the companies mentioned in this article are those of the author and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. At The Motley Fool, we believe that considering a wide range of ideas makes us better investors.