Sainsbury's eyes bid for giant Tesco supplier

J Sainsbury (Other OTC: JSAIY - news) is exploring a takeover bid for Palmer & Harvey (P&H), the UK's biggest tobacco distributor and a key component of the supply chain of the supermarket chain's arch-rival, Tesco (Frankfurt: 852647 - news) .

Sky News has learnt that Sainsbury (Amsterdam: SJ6.AS - news) 's is in the early stages of examining a bid for P&H, which was put up for sale several weeks ago.

Sources said there was no certainty that Sainsbury's would proceed with an offer, which would come within months of it completing the acquisition of the much larger Home Retail Group, the owner of Argos.

If Sainsbury's does move to buy P&H, it would be interpreted as a defensive move following Tesco's agreed £3.7bn takeover of Booker, the wholesale giant.

It would also underline the seismic shift which continues to take place within Britain's grocery industry amid efforts to compete more effectively with online-only retailers.

One insider described Sainsbury's interest on Friday as "highly speculative", suggesting that P&H's finances were in a sufficiently weakened state to make a takeover of the wholesaler "difficult".

Sainsbury's has already provided some support to P&H through its trading finance platform, which effectively enables suppliers to borrow money cheaply from it.

P&H only recently signed an extension to its supply agreement with Tesco, on behalf of which it distributes tobacco products to every store owned by the UK's biggest retailer.

Tesco accounts for roughly 40% of P&H's revenues, although the contract extension is thought to last for just 18 months, which could allow any rival buyer - such as Sainsbury's - to shed that relationship relatively quickly.

P&H hired PricewaterhouseCoopers (PwC) to oversee a sale process just weeks after sealing a financial rescue package led by two of the world's largest cigarette makers.

The move to sell the business, which is owned by current and former employees, is said to have been instigated by P&H's creditors, with Imperial Brands (LSE: IMB.L - news) and Japan Tobacco International (JTI) now ranking among the largest of those.

Last month, Imperial and JTI - which between them own brands such as L&B and Silk Cut, agreed to lend substantial multi-million pound sums to P&H to secure its immediate future.

In a statement issued to Sky News earlier this month, a P&H spokesman said: "Palmer & Harvey recently completed a successful refinancing of the business, and we are focused on capturing the opportunities within our market."

Grocery industry sources have said that the tobacco companies remained the likeliest purchasers of the business, although analysts speculated that a number of big retailers could also be interested.

P&H, which employs about 4000 people, is one of the UK's biggest private companies by sales, and among the largest to be owned by current and former employees.

Lenders to it, which include Barclays (LSE: BARC.L - news) and Royal Bank of Scotland (LSE: RBS.L - news) , had become increasingly anxious about the potential ramifications of Tesco's proposed £3.7bn acquisition of Booker.

The extent of P&H's revenues dependent upon the UK's biggest retailer has stoked fears that a huge chunk of its business could shift to Booker if that takeover is completed.

However, a crisis at P&H would also damage Tesco's argument that the Booker takeover would not infringe competition in Britain's grocery supply industry.

Booker owns the Budgens and Londis fascias, although Tesco has argued that they are operated using a franchise model, and should not be used to justify rivals' arguments that the deal is anti-competitive.

The Competition and Markets Authority is widely expected to refer the Tesco-Booker deal to a so-called Phase-II inquiry, which would elevate it to the most rigorous level of anti-trust scrutiny.

P&H was established in 1925 as a tobacco and sweets wholesaler, and is the biggest distributor to the UK's convenience sector.

It serves about 90,000 outlets across the country, using a fleet of 1,300 vehicles.

The company is run by Tony Reed, a former boss of Tesco's convenience retailing business, who joined just a few months ago.

A spokeswoman for Sainsbury's declined to comment.