Morrisons Could Attract Other Bidders After Rejecting £5.5bn Offer
US private equity firm Clayton, Dubilier & Rice (CD&R) is expected to push ahead with its pursuit of Morrisons despite an initial offer being rejected. Reports suggest the UK’s fourth largest supermarket chain could also attract bids from other companies, including Amazon.
It was revealed on Saturday that Morrisons had last week rebuffed a preliminary takeover bid worth just over £5.5bn from CD&R. After the news broke, the Bradford-based retailer issued a statement saying the 230p a share cash offer “significantly undervalued” its business and future prospects.
Morrisons’ share price has fallen over the last year after its profits took a hit from additional costs related to operating during the pandemic, which cancelled out the benefits from booming sales. The group’s share price closed at 178.45p on Friday, valuing it at £4.3bn.
Under the UK’s takeover rules, CD&R has until 17 July to make a firm offer or walk away. A report by the Financial Times yesterday quoting “people close to the transaction” said the private equity firm remains interested but plans to wait to gauge investor reaction and signs of any political pushback before deciding on its next steps.
Among CD&R’s advisers is Sir Terry Leahy, the former Chief Executive of Tesco. A takeover would reunite him with Morrisons’ Chairman Andrew Higginson and Chief Executive David Potts, both of whom worked with Sir Terry at Tesco.
CD&R, a former owner of B&M, also controls forecourt operator Motor Fuel Group (MFG). Its 900-plus sites could potentially host Morrisons convenience stores if a deal were successful.
Analysts suggested that Morrisons could also face more overtures as its strong cashflow and property assets make it an attractive target to private equity players. It owns the freehold for 85% of its 497 stores and operates 19 manufacturing sites that supply around one-quarter of what it sells.
Given its grocery delivery partnership with the supermarket, Amazon could also be drawn into making a bid. The online giant launched its first physical grocery stores in the UK earlier this year and easily has the funds to snap up Morrisons to accelerate its ambitions to grab a significant share of the market.
It is unlikely that another UK supermarket group would make a move for Morrisons, given that an attempted combination of Sainsbury’s and Asda was blocked by the competition regulator in 2019.
A potential bid battle could put other UK supermarkets in line for an offer. One analyst quoted by The Guardian 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.”
Profit pressures have also impacted Tesco’s share price with the business currently valued at £17m. Meanwhile, Daniel Kretinsky, the Czech billionaire whose retail investments include France’s Casino and Germany’s Metro, recently raised his stake in Sainsbury’s to 10%, sparking speculation that it could be targeted in a deal to take it private.
Meanwhile, The Times reports today that Morrisons’ board recognises that the retailer is now “in play”. However, as well as an attractive price, it is expected to want commitments and assurances from any bidder on the future of its workforce, manufacturing and pensions.
Nick Bubb, a leading 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’s 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.”
Shares in Morrisons surged up by over 30% in early trading this morning.
NAM Implications:
- A deal could potentially reunite Sir Terry with Andrew Higginson and David Potts.
- Anticipate a further, higher offer.
- Any deal would have to go through regulatory hoops, CMA etc.
- The future would be about finance-based performance, aggregation of Morrisons and MFG buying power, to start…
- Meanwhile, checking for any potential prices & terms disparities (before CD&R point them out) might be to your advantage…
