An unsolicited £5.5bn private equity bid for Morrisons, swiftly rejected by the supermarket chain, could spark a bidding war for Britain’s fourth biggest grocer and has raised concerns that other supermarket groups could be sold off to private equity.
On Saturday night Morrisons said it had rebuffed a preliminary takeover bid worth just over £5.5bn from the US firm Clayton, Dubilier & Rice (CD&R), which had offered to pay 230p a share in cash. Morrisons’ share price closed at 178.45p on Friday, valuing the company at £4.3bn.
Like its bigger rival Tesco, Morrisons’ shares are below their pre-pandemic levels as profits have fallen in the past year, owing to higher costs due to the Covid crisis cancelling out the benefits from booming sales.
The Bradford-based company said its board “unanimously concluded that the conditional proposal significantly undervalued Morrisons and its future prospects”. Conditions included the completion of detailed due diligence and the arrangement of debt financing. New York-headquartered CD&R has until 17 July to make a firm offer or walk away.
CD&R declined to comment on whether it would come back with a higher bid, but analysts said its approach was probably the first of several overtures. They said the cashflows and property assets of Morrisons – and other supermarket groups – made them attractive targets to private equity players.
Private equity firms have snapped up more UK companies in the last 18 months than at any time since the financial crisis in a £52bn deal frenzy, according to data from Dealogic, raising fears of “asset stripping” and job losses.
Seema Malhotra, the shadow minister for business and consumers, said: “Britain’s supermarkets stepped up to serve communities during the pandemic. Our supermarkets that play a role at the heart of our communities need owners that put the long-term interests of the business and its employees first.
“When Debenhams went bust we saw private equity firms walk away while employees lost their jobs and staff who have paid into the pension scheme were left out of pocket. Too often dodgy private equity firms load the companies with debt and leave while pocketing the dividends. This has to end.”
Asda has just been acquired by the petrol forecourt billionaires Issa brothers and the private equity firm TDR Capital in a debt-fuelled £6.8bn buyout. CD&R could combine Morrisons, which has few convenience stores, with its Motor Fuel Group of 900 petrol stations. There are also concerns that it could follow the Issas’ example by loading Morrisons with debt and selling off its property assets.
CD&R is likely to wait before taking its next step, to gauge investor and public reaction.
Morrisons employs 121,000 people and made a pre-pandemic annual profit of £408m, which halved to £201m for 2020. It owns the freehold for 85% of its 497 stores, and prides itself on its 19 manufacturing sites including bakeries, abattoirs, fishing fleets and egg farms. One-quarter of what it sells comes from its own supply chain.
Among CD&R’s advisers is Sir Terry Leahy, the former Tesco chief executive. A Morrisons takeover would reunite him with Andrew Higginson, the Morrisons chair, and David Potts, the chief executive, both of whom worked with Leahy at Tesco.
Bryan Roberts, a retail analyst who runs the consultancy Shopfloor Insights, argued that CD&R had shown with the B&M discount chain, which it sold in 2018 after banking a £1bn profit from a successful stock market listing, that they were “responsible investors”. He estimates that a successful bid for Morrisons would need to be worth more than 300p a share.
He said other private equity groups, such as KKR, could enter the fray, as well as Amazon, which has a partnership with Morrisons and offers same-day grocery deliveries.
For competition reasons, takeovers or mergers between supermarket groups look unlikely – Sainsbury’s £7bn takeover of rival Asda was blocked by Britain’s competition watchdog two years ago, which ruled that the deal threatened to push up prices and reduce the choice and quality of products on sale in stores. “But it’s game on for private equity investors,” Roberts said.
Analysts said even Tesco, the UK’s biggest retailer with a market value of £17bn, could be bought by private equity.
One analyst said: “The whole industry is in play now. It’s not unrealistic to say that there could not be a single quoted British supermarket left in the foreseeable future.”
At Sainsbury’s, the UK’s second biggest supermarket chain, the Czech businessman Daniel Křetínský, known as the “Czech sphinx,” has built a stake of 10%. He failed in an attempt to take over Germany’s Metro Group last year, and regards supermarkets as stable investments.
Nick Bubb, an independent retail analyst, said: “I suspect a [Morrisons] deal can be agreed at 250p-260p and after that the focus will increase on a potential breakup of Sainsbury and even Tesco, so it should be a lively day on the stock market tomorrow. I certainly wouldn’t want to be a hedge fund short of any of the big three.”
He noted that Morrisons’ shares had been trading sideways at about 180p for much of the last 18 months. “There are plenty of bears out there who think that there is too much capacity in the supermarket business, given the growth of Aldi and Lidl and the growth of online shopping, and that somebody like Morrisons will be squeezed.”