The stock market is brutal and moves quickly to the main question. If 230p-a-share is not enough to persuade the directors of Morrisons to roll over and accept private equity’s money, what is?
The working assumption is that the “killing ground”, in the investment banker’s charming lingo, lies around the 260p mark – enough to allow the board to claim a stupendous uplift on last week’s 178p, and not too much to jeopardise Clayton, Dubilier & Rice’s debt-heavy financial model. Morrisons’ closing share on Monday of 240p fits the script: the market expects a deal.
But let’s hope this saga brings a few surprises, such as stiff resistance from Morrisons’ boardroom, or the shareholders. This latest attempted raid on the stock market by private equity is depressing. At heart, it looks an old-fashioned leveraged buyout in which Morrisons’ staff – and the poor old shoppers – will be an after-thought.
One could go further. Now that Asda has been bought via a similar leveraged model, and with takeover speculation swirling around Sainsbury’s, it’s not hard to imagine how 40% of the UK’s grocery market could end up under the control of financial owners. From a competition perspective, that would a disaster. Private equity houses do not do price wars. Gently rising profit margins, wrung from customers by stealth, are far better for making the debt repayments.
Morrisons is not a company in need of new management, a fresh strategy or even access to capital. It has a simple model that throws off cash when the business is run well, which it has been in recent years.
Profits this financial year are predicted to beat the last pre-pandemic year’s by a distance and, even including a Covid year, shareholders have had £1bn in dividends since 2017. The current balance sheet also looks bullet-proof. Net debt of £1.8bn, ignoring lease liabilities, will fall quickly when Covid one-offs reverse. The group owns 85% of its properties – assets that have stopped falling in value. There’s even a surplus in the pension fund. The business works in its current form.
The big problems are a lack of growth opportunities and a soggy share price. The latter has created the opportunity for CD&R to take a pop, but it is hard to see how the bidder could credibly claim to be able to run Morrisons better. Yes, Sir Terry Leahy, former Tesco boss, would be installed as non-executive chair, but the current ex-Tesco crew in Morrisons’ boardroom seem know what they’re doing.
CD&R has ideas about bolting on a chain of petrol stations it already owns, and opening a few convenience stores on the forecourts, but those will be add-ons to the main exercise in debt gymnastics and property deals. The Issa brothers and TDR Capital showed what’s possible by financing their takeover of Asda with junk bonds at remarkably low interest rates, but anybody can do leverage. Andrew Koch, senior fund manager at Legal & General, was right when he said private equity “would not be adding any genuine value” by flogging property and paying themselves cash.
If Andrew Higginson, Morrisons’ chair, wants to fight for independence, or even just a decent price, he needs to sound more indignant. The late Sir Ken Morrison would have been spitting with fury by now, rallying shareholders to recognise Morrisons’ inherent strengths. The few boilerplate words that emerged from the Bradford HQ at the weekend were too timid.
Higginson could try modelling sale-and-leaseback structures of his own, if that’s what shareholders want. At least prepare a dossier on the property portfolio, including its farms. And ring Amazon to see if it’s interested in buying an equity stake to add to its online partnership deal. David Potts, the chief executive, could do his bit by expanding on his recent refrain about a “renaissance” for UK supermarkets. What does he think it means for dividends over the medium-term? Sketch out a few scenarios to switch the focus from the market’s soft rating of the entire supermarket sector.
Berenberg’s analysts, incidentally, calculated that CD&R would still be able to make an internal rate of return of 19% if it paid 270p a share. Morrisons board should take that as a challenge. Do not capitulate cheaply or be fooled by notional fat takeover premiums. Morrisons is a good business and independence suits it.