Lord David Sainsbury left office just in time to thwart the largest attempted private equity buyout in Britain, one which he felt undervalued the firm

When David Sainsbury was a small boy, the grocer that bore his name was a true family business with no outside shareholders. This week, he helped thwart the largest attempted private equity buyout in British history - but it was a close-run thing.

By the 1990s, Sainsbury's franchise had begun to grow fast, and in 1998, J Sainsbury was a public company. The by now Lord Sainsbury of Turville stepped down as chairman and renounced control of his shares to become a government minister.

It could have had fateful ramifications for the future of the company founded by his great-grandfather. The holding was gradually reduced by a blind trust, until February 12th this year when Lord Sainsbury gained control of the remaining 7.75 per cent stake just in time to thwart the largest leveraged buyout in European history.

"The [ CVC-led] consortium mistimed their bid," says one person familiar with the situation.

"They should have bid before David Sainsbury came out of his ministerial position in November last year. That way he would not have been able to say he was not a seller of his shares."

It is true that the family would have lacked the influence of its biggest shareholding member and they would have had less firepower to shoot down a bid that was eventually deemed fair by the board and a large bloc of institutional shareholders.

The consortium did not make a move until Lord Sainsbury had his shareholdings back. And once he did, everything began to change. Chairman Sir Philip Hampton rang to arrange a meeting with Lord Sainsbury and the company's advisers.

Sainsbury sources say Lord Sainsbury was sceptical about what CVC could bring to the party. If there were not industrial synergies, and nothing in the strategy that the company was not already doing, the basis of the offer must be an undervaluation of the business. Peter Botts, a consultant to CVC, and Nick Jones, of Lazard, approached Lord David Sainsbury's office and were given the same message. But the consortium thought that the Sainsbury family might be bluffing.

In late February, the consortium sent a letter to Sir Philip. It was the first indicative offer to get the ball rolling. At 540p a share, the consortium knew it was unlikely to be enough.

Sir Philip passed the offer on in the proper manner to Lord John Sainsbury and Lord David Sainsbury. "The message went back pretty strongly," says someone in the Sainsbury camp. And that message was not good for the deal. But Lord David and Lord John did have slightly differing views. John was not willing to open the books at all. David put a price on due diligence. And that was at least 600p a share.

The deal was still not dead on its feet. If the consortium was insisting on a 75 per cent acceptance level to structure the new company in a tax-efficient way, they might just scrape in at that point even without those two key family members.

But Robert Tchenguiz was a real spanner in the works. He started building a 5 per cent shareholding in March and then made it clear that he too was holding out for a higher offer.

Pressed against the deadline, it was on Maundy Thursday that the consortium put in its 562p-a-share offer, again rejected, but now the board was signalling that a higher price could make some difference.

On Easter Sunday, CVC called Sir Philip with an offer of 582p a share. It was a price that the chairman wanted to recommend.

His advisers had told him that more than 50 per cent of the shareholders would accept. But still he could not deliver the terms: the family's blessing, resolution of the pension fund and 75 per cent of acceptances.

"They [ the family] wanted to kill this deal at birth," one person close to the situation said. When CVC returned with its higher offer, the board of Sainsbury called the family. They were still resistant, but were prepared to have their advisers meet Sainsbury's advisers.

"But we knew this was purely lip service at this point and that the family were just trying to prove they weren't intransigent," one person said.

It was a fatal combination of factors that killed the proposed deal. The talks were conducted during a period of unprecedented public scrutiny concerning the role of private equity's acquisition spree; key shareholders did not want to do a deal with private equity; and issues surrounding Sainsbury's pension scheme. - ( Financial Times service )