Private equity interest: Why is Morrisons such an attractive takeover target?
Morrisons has rejected a £5.5bn takeover approach from a US private equity firm amid speculation that more UK supermarkets could be snapped up.
Shares in Morrisons jumped earlier this morning following confirmation of the rejection at the weekend, as the chain said potential bidder Clayton, Dubilier & Rice “significantly undervalued” the grocer with its 230p-per-share enquiry.
UK supermarkets have been buoyed by the pandemic over the past year as sales were boosted by the closure of non-essential shops and hospitality firms.
Nevertheless, Morrisons was among grocers to post lower annual profits after being hit by high pandemic costs.
This has not been enough to put off prospective bidders, and analysts have predicted that this takeover tussle could rumble on. Here we answer the key questions about the potential takeover of Morrisons:
Who currently owns and runs Morrisons?
The Bradford-based retailer was founded by William Morrison in 1899 as an egg and butter stall in Rawson Market.
Morrisons steadily expanded and became a publicly listed business under the leadership of Ken Morrison in 1967, listing on the London Stock Exchange.
It expanded further in 2004 with the £3.3bn acquisition of rival Safeway, which helped to grow the northern-focused retailer further south.
The group has remained publicly owned since 1967, with the firm now largely owned by a raft of institutional shareholders, including Silchester International, Columbia, Blackrock and Schroders.
Morrisons has been led by chief executive David Potts since 2015, alongside chief operating officer Trevor Strain and chief finance officer Michael Gleeson.
Potts would be in line for a £17m payday were the 230p-per-share move accepted and all his share interests paid out.
Who is the potential buyer?
New-York based private equity firm Clayton, Dubilier & Rice (CD&R) tabled the bid on June 17 in an effort to expand its European retail footprint.
The 43-year-old company is one of the most firmly established investors in the sector and has been advised by former Tesco chief Sir Terry Leahy over the past 10 years.
Sir Terry, who has been heavily involved in its approach for Morrisons, helped CD&R secure a 60 per cent stake in discount retail group B&M in 2013.
It is understood that CD&R roughly doubled its initial investment in B&M when it exited in 2018, having banked around £1bn.
CD&R is also the owner of forecourt giant Motor Fuel Group (MFG), sparking speculation that it could strike a similar deal to the acquisition of Asda by EG Group founders the Issa brothers and private equity backers TDR Capital.
Why Morrisons and what are potential plans for the business?
Sources close to CD&R have said the firm believes it “shares the values of Morrisons” and recognises the quality of the retailer.
An acquisition could result in some combination between Morrisons and MFG, with Morrisons currently operating fewer convenience and forecourt stores than some of its competitors.
Morrisons also appears an attractive opportunity for private equity as its share value sat below its pre-pandemic valuation last week, prior to the takeover-fuelled jump.
Thin margins and rising costs have continued to press down on valuations in the supermarket sector, fuelling regular speculation for potential takeovers.
Nevertheless, Morrisons has significant ownership of parts of its supply chain and a large property portfolio which will appeal to possible buyers.
Neil Wilson, chief market analyst at Markets.com, said: “Owning the bulk of its store estate outright makes it an attractive asset for private equity intent on gearing it up.”
What can we expect next?
Morrisons shares leapt above 235p on Monday, suggesting the investment community believes that a bid higher than the 230p approach is still on the cards. CD&R now has until July 17 to table a firm bid for Morrisons under takeover regulations.
Other private equity firms may not be keen to engage in a bidding war and drive up the price of the supermarket, although there is still significant investor appetite for the sector.
There is also the potential that a major retail group could enter the fray with an offer. Morrisons has a long-standing partnership with US online retail giant Amazon, with Morrisons selling groceries through its online platform in the UK.
Amazon has also grown its bricks and mortar retail business in recent years with its acquisition of Whole Foods in 2017 and its recent launch of three Amazon Fresh till-free stores in London.
London-based AJ Bell investment director Russ Mould said: “Strategically, Morrisons has cemented an important relationship as a key supplier and partner to Amazon, and to McColl’s convenience stores.”
“Amazon has long been touted as a potential buyer for Morrisons to help give it a much stronger foothold in the UK grocery markets so that’s an obvious name to watch,” he concluded.