Sainsbury's takeover bid collapses

Delta Two has been attempting to raise an extra £500m (€720.7m) in financing for its bid but its efforts to raise cash have been hampered by the credit crunch in debt markets.

The end of the talks comes after a previous takeover approach by a consortium of private equity firms foundered earlier this year.

Delta Two is backed by the Qatar Investment Authority (QIA), whose chief executive is Sheikh Hamad bin Jassim bin Jaber al Thani - Qatari prime minister and a member of the country's royal family.

The investment vehicle first made its approach in July and Sainsbury's agreed to open its books in September.

But the deal has now become the latest victim of the credit squeeze as Delta Two said since its original approach "the required funding and the cost of capital has increased significantly, which has adversely affected the investment case".

The decision also comes amid reports that the QIA was not prepared to provide the extra £500m (€720.7m) needed by Delta Two for the bid in the tight credit conditions.

Sainsbury's chief executive, Justin King, who has led a recent revival in fortunes for the UK's third biggest supermarket chain, said the interest reflected the success of the group's recovery strategy.

But the impact of the withdrawal seems set to take its toll on the group's share price, which has been buoyed by the prospects of a takeover.

Martin Slaney, head of spread betting at GFT Global Markets, said: "Our indicative open for Sainsbury's shares this morning is for a fall of around 15%, given the withdrawal of the Qatari bid."

Delta Two's 600p-a-share indicative offer was said to have had support from the Sainsbury family - which holds around 18% of the shares - subject to approval from the trustees of the group's pension fund, which has 85,000 members.

The would-be buyer's investment adviser, Paul Taylor, said the group had "constructive and collaborative" discussions with the board and trustees, but the additional funding needed from the QIA finally prompted the suitor to walk away after more than three months of discussions.

Potential buyers of the supermarket chain have been attracted by its freehold property portfolio - estimated to be worth more than £8bn (€11.5bn). Bidders have looked at selling off property assets and increasing the company's debts to boost shareholder returns.

In April, private equity firm CVC abandoned its plans to take Sainsbury's private after failing to win support for its 582p-a-share proposed offer. The bidder was also unable to agree a deal with the supermarket's pension trustees.

Sainsbury's, which like all supermarkets has faced pressure from a tougher consumer environment and poor weather this year, is due to report interim trading figures next week.

In the year to March 24, the group reported a 42% increase in underlying annual profits to £380m €547.6m).

Shares in the supermarket chain slumped almost 19%, or 105p, to 450p when the London Stock Exchange opened this morning.

Seymour Pierce analyst Andrew Wade said: "Although the management team at Sainsbury's has done an excellent job starting the recovery and driving sales growth, there is much still left to do and we cannot see the business supporting the current share price."

He added: "The deterioration of the credit markets since the initial approach and the difficulty of coming to an acceptable agreement with the pension trustees appear to have been the major stumbling blocks.

"Although this had, for some time, looked very much a done deal, it seems the £500m (€720.7m) request for additional equity last week was the last straw for the Qataris."