Wm Morrison Supermarkets PLC yesterday surged above the value of Clayton Dubilier & Rice LLC’s (CD&R) ￡5.5 billion (US$7.6 billion) bid, indicating that the private equity firm might have to pay significantly more or fend off rival offers for Britain’s fourth-largest grocer.
The supermarket operator, which employs nearly 110,000 people in the UK, has already rejected the ￡2.30-per-share proposal that was disclosed over the weekend, setting the scene for a short, but potentially heated takeover battle.
Under British takeover rules, CD&R has 28 days to make a firm offer or walk away.
Photo: Reuters
The 30 percent gain in the shares lifted the grocer’s market value to ￡5.6 billion. Morrison had a market value of ￡4.3 billion before the bid.
“I am surprised CD&R came in so low, but maybe they are just trying to draw them into a debate over monetizing assets before the real bid comes,” Panmure Gordon retail analyst Tony Shiret said.
CD&R’s approach reflects continued private equity interest in Britain’s supermarket sector, following a ￡6.5 billion deal by TDR Capital LLP and brothers Mohsin and Zuber Issa to buy a majority stake in Asda Stores Ltd, the UK’s third-largest grocer, from Walmart Inc.
Other private equity funds, including Lone Star Funds and Apollo Global Management Inc, also placed bids for Asda at a time when supermarket valuations are languishing despite a boost from stockpiling related to COVID-19 and people dining more at home.
The ease with which the Issa brothers and TDR financed the Asda transaction, including raising the largest-ever sterling junk bond, could also make the economics of funding a Morrison deal attractive, Shiret said.
“Morrison’s is a simpler business than Asda, and has more saleable assets,” he said.
The proposal values Morrison stock at about 29 percent more than Friday’s close, already a potentially significant premium for shareholders who have been sitting on one of the worst investments in European food retailing. Over the past four years, the stock has dropped 26 percent, the biggest decline among the 20 companies on a European index of drugstore operators and grocers.
Silchester International Investors LLP, one of Britain’s biggest boutique asset managers, is the largest shareholder with a 15 percent stake.
Representatives for CD&R and Morrison declined to comment.
Although the UK grocery business is hypercompetitive and profit margins are thin, Morrison is considered asset rich. It owns most of its nearly 500 stores, while many rivals have carried out sale-and-leaseback transactions to generate cash.
Morrison’s freehold property portfolio — a UK designation for ownership of underlying real estate, not just the walls of a home or store — is valued at close to ￡6 billion, above the company’s market capitalization.
Following a turnaround led by Morrison chief executive officer David Potts, the company also has a net pension surplus of ￡718 million and low underlying debt. It remains a highly cash-generative business with growing e-commerce partnerships with Amazon.com Inc and Deliveroo PLC. Unlike rivals, Morrison also has a large wholesale division, as it makes much of the food it sells.
CD&R is no stranger to British retail and works closely with former Tesco PLC chief executive officer Terry Leahy, who drove that grocer’s expansion at the turn of the millennium.
The private equity firm, which focuses on targets in North America and Europe, manages more than US$35 billion of stakes in 100 companies. It invested in B&M European Value Retail SA, a UK discounter, before taking it public in 2014.
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