Shares of listed supermarkets jumped yesterday as investors prepared for a bidding battle on Morrison.
Huge rally following a £5.5bn bid for the UK’s fourth-largest grocery from New York-based private equity firm Clayton Dubilier & Rice (CDR).
Morrison, which rose more than 30 percent, declined the 230p per share offer, saying it ‘significantly underestimates’ the company and its prospects.
On a high: Morrison, led by boss David Potts (pictured), rejected a 230p per share offer from Clayton Dubilier & Rice (CD&R), saying it ‘significantly underestimates’ the company
And top 10 shareholders Legal & General said it would not add ‘real value’. But CDR is said to be preparing for another move, with other suitors waiting in the wings.
Internet shopping giant Amazon may kick off the process, while private equity firms Lone Star and Apollo had previously bid for Asda.
Amid all the speculation, investors were licking their lips as Morrison’s shares closed up 34.6 percent, or 61.75p, at 240.2p.
This was above the CDR’s offering price of 230p per share, a sign that Morrison is on some way in the buying race.
Analysts at Barclays said: ‘We are inclined to think that this offer is unlikely to justify paying the maximum. We think the story is unlikely to end with Morrison’s disapproval.’
Rivals Sainsbury’s also closed up 3.8 percent at 270.1p, Marks & Spencer up 2.8 percent at 152.75p and Tesco up 1.7 percent at 225.6p.
If Morrisons is stripped of private equity, it would be the latest major British business to be pulled from the public markets.
Others sold during the pandemic include the owners of Asda, AA and even Butlin, raising fears for jobs and transparency.
Morrison’s owners are ‘happy to remain as PLC’ but also believe that each company is up for sale at the right price.
They have already devised a defense strategy, with the help of Rothschild’s advisors, due to previous warnings that the supermarket’s relatively low share price made it vulnerable to takeover.
Under UK takeover rules, potential bidders now have until 17 July to announce their intention to bid or walk away.
Russ Mold, investment director at AJ Bell, said: ‘Morrison’s market value had weakened so much that it apparently triggered some alert in the private equity space to say the value on offer seemed more attractive.
The issue now is how large shareholders respond and whether they — and the Morrison board — think they can squeeze a higher bid or feel confident enough in Morrison’s position to turn down the offer altogether. .
‘The market is confident that the bidder will have to make their offer or someone else can step into the game and we will see a bidding war.’ The grocery sector is highly competitive and is not seen as a typical hunting ground for private equity firms.
But the strength of supermarkets during the pandemic, the amount of cash they generate, their tendency to own multiple properties and the relatively poor performance of UK stocks have attracted attention.
Andrew Koch, senior fund manager at L&G, said he does not expect the CDR to be successful unless it raises its bid. CDR is believed to have seen an opportunity in Morrison’s short position in convenience groceries.
It already owns petrol station operator Motor Fuel Group, which has 900 forecourts in the UK, and analysts believe it may try to put Morrisons stores in each one.
Former Tesco boss Sir Terry Leahy is a consultant and is believed to have played a key role in formulating CDR’s plans. If CDR buys the supermarket, it is understood that Lehi will be the chairman.
hunters circling UK grocers
US private equity giants KKR, Apollo Global Management and Lone Star — as well as internet titan Amazon — have all been mentioned as rivals to the Clayton Dubilier & Rice (CDR) bid.
Amazon has a grocery deal with Morrisons, offering customers same-day delivery. But it has fallen out of a battle of first takeovers — not willing to pay a very high price. Investors’ hopes of a bidding war were quelled by fears that private equity firms could undermine Morrison’s long-term prospects.
A buyer looking to buy Morrison and sell his properties can rake in quick returns, leaving him vulnerable in any downturn if he struggles to pay his rent. Private equity firms have also been known to put a debt load on companies when they sell them, usually after about five years.
Like Debenhams, which collapsed in December 2020, it could see a business struggling to pay off debt if the economy turns sour. Labor lawmakers fear a private equity buyer may cut the workforce to cut costs.
In the UK, David Novak is head man at CDR, which previously spun off discount retailer B&M. Consultant Richard Hyman said CDR has helped B&M grow, adding: ‘It’s a very good business.’
CDR is also set to buy Dublin-based UDG Healthcare, whose shares are already listed in London for £2.6 billion.