How much weight does the board of Morrisons truly attach to selling the company only to a “responsible” owner? A lot, one assumes, because the chairman, Andrew Higginson, used three of his four paragraphs of commentary on the Fortress-led consortium’s £6.3bn offer to heap praise on the would-be owners.
Morrisons’ board studied the “overall suitability” of Fortress, the Canadian pension fund CPP and Koch Industries to own “a unique British food-maker and shopkeeper with over 110,000 colleagues and an important role in British production and farming” and decided the combo came up trumps. The bidders had a “full understanding and appreciation of the fundamental character of Morrisons” and had “strong track records and a long-term approach to investing”.
There is, perhaps, a slice of hopeful thinking in that analysis. Fortress is not running a charity; it’s managing pools of private capital, just like the potential gatecrashers, Clayton, Dubilier & Rice (CD&R) and Apollo. And note that Fortress’s commitments to good behaviour, covering industry-beating pay rates for staff and so on, were “statements of intention” rather than binding “post-offer undertakings” that can be enforced through the courts by the Takeover Panel, the City policeman on bids.
Never mind the small print, though. Morrisons’ board clearly heard enough to be convinced. It raises the intriguing question of what it would do if, after a few more rounds of action, the position came down to this: a pledge-heavy offer – say at 280p a share – from the Fortress consortium versus 290p from CD&R or Apollo with zero promises on debt, sale-and-leasebacks, pensions and pay.
Would Morrisons’ board recommend the lower offer, in effect asking shareholders to leave a few pennies on the table for the sake of the workers?
The situation may never arise, but the underlying tension clearly exists. Indeed, Fortress may have hyped its commitments in the hope of deterring other bids. CD&R or Apollo could match some, but it’s hard to see how either could credibly meet the Morrisons board’s apparent wish for a “long-term” owner. On day one, they will be committed to selling within five years or so because that’s their purer private equity model.
Alternatively, Morrisons’ board could do the traditional thing reluctantly: forget the behavioural stuff, plead fiduciary duty and back the highest cash bid. In that case, it would have to explain why it bothered gushing over Fortress in the first place.
Or it could fudge the question by saying shareholders should decide. It could hold two votes if necessary, with the cuddlier one given first shot. There have been occasions in the past when boards have recommended lower offers but it has invariably been for financial reasons – doubts over a bidder’s financing, for example. An invitation to think of the workers would be a genuine novelty.
One rather hopes we get that far. We would all benefit from an insight into whether the City’s newly acquired rhetoric on ESG (environmental, social and governance) is mostly marketing or is firmly held belief. Either way, Morrisons’ board, having raised the responsibility question, cannot easily make it disappear. The point about principles is that you’re meant to stick to them.
Property the key to Morrisons’ true value
And here comes Legal & General Investment Management, one self-styled “responsible steward of capital”, making a different point about the battle for Morrisons. “The company has thus far disclosed little information about the current value of its properties, both the retail stores and the distribution assets,” says the fund manager Andrew Koch.
That’s true, and Morrisons ought to rectify the situation. About 90% of City analysts’ debate about the value of supermarket business relates to exciting short-term factors such as sales, profit margins and market shares. The duller part that gets far less attention is the property holdings.
Morrisons’ assets have stopped falling in value, according to the last update that put the freehold property at £5.8bn, but what’s the outlook if stores can now double up as picking centres for online deliveries? And what’s the long-term view on those Morrisons farms?
The company should show its hand more fully. Yes, Fortress’s 254p looks pretty against the old share price, but shareholders only get to sell their company once. A detailed look at the property portfolio is essential. The bidders, you can be sure, will have done their own homework.