J Sainsbury Plc is selling its U.S. stores to Albertsons Inc. for $2.5 billion as it fights a price war which Britain's third-biggest grocer says will hit profits this year and next.
Shares in Sainsbury dropped over eight percent on Friday as the 135-year-old firm said it would sacrifice margins to keep pace with heavy discounting by U.K. rivals, who are jostling for position following Morrison Supermarkets' three-billion-pound takeover of Safeway earlier this year.
Sainsbury said the sale of Shaw's stores to U.S. No. 2 grocer Albertson's would let it invest more in the U.K., where it is trying to claw back customers from Tesco and Wal-Mart's Asda, as well as fend off fourth-placed Morrison.
Albertsons, emerging from a damaging labor dispute in Southern California, said the deal would boost 2004 earnings and take its national presence to over 2,500 stores as it tries to make ground on supermarket giant Wal-Mart Stores Inc.
The market leader in 1995, Sainsbury lost ground during years of under-investment. It has responded by spending billions of pounds on revamping stores, computer systems and distribution depots, but there has been little improvement in sales and investors are concerned it is being squeezed between value grocers like Tesco and upmarket players like Waitrose.
"There's still no real evidence of a recovery. If anything, it's getting worse," said BWD Rensburg fund manager Colin Morton.
Like-for-like sales at Sainsbury's 550 U.K. stores fell 0.9 percent in the fourth quarter of its financial year as its recovery program continued to disrupt business. That takes the decline for the full year to 0.2 percent.
By comparison, Morrison posted a 9.7 percent rise in like-for-like sales for the six weeks to March 14.
Outgoing Sainsbury Chief Executive Peter Davies said competition among U.K. supermarkets was more intense than at any time he could remember since joining the industry in 1973.
But Sainsbury would be in a strong position to fight back when its three-year Business Transformation Program was completed this summer, he said, adding the firm would launch its own discounting campaign at that time.
The prospect of a more intense price war dragged down shares of Sainsbury's UK rivals, with Tesco shedding about 2.4 percent and Marks & Spencer down about one percent.
Davies, who is stepping up to chairman next week and being replaced by former M&S head of food Justin King, said the price cuts would result in a small drop in underlying profits in the year to March 27, and also impact earnings next financial year.
Sainsbury made a profit before tax, goodwill and exceptional items of 695 million pounds last financial year, and analysts had been expecting a profit of about 710 million this year.
"Sainsbury's is the great shrinking act, and it's now shrinking slightly faster than I thought," said Tim Attenborough, retail analyst at BNP Paribas.
Founded as a small London dairy in 1869 and still 35-percent owned by the Sainsbury family, Sainsbury said it would return 680 million pounds of the proceeds from selling Shaw's to shareholders, equivalent to 35p-per-share.
It would use the rest to buy more stores in the U.K., and said it was in talks to buy 20 shops from three unnamed retailers.
CEO Davies also said Sainsbury would look to buy more convenience stores as Britain's big supermarket group's battle to meet growing demand for so-called "top-up" shopping.
Like-for-like sales at Shaw's 202 New England-based supermarkets fell 1.1 percent in the fourth quarter.
Albertsons said it expected to complete its purchase of Shaw's in the second-quarter of this year, pending U.S. government approval. It plans to finance the deal from equity, debt and existing cash resources.