A bidding war for Morrisons is set to erupt after the supermarket rejected a shock £5.5bn bid by a US buyout firm advised by former Tesco boss Sir Terry Leahy.
Clayton Dubilier & Rice’s (CD&R) proposed takeover of the British grocer is likely to be gatecrashed by rival bidders, deal insiders said, with interest expected to come from American private equity firms Lone Star and Apollo Global Management as well as Amazon, which has a long-running grocery deal with Morrisons.
Nick Bubb, an independent retail analyst, said: “It is possible that Amazon will gatecrash the party and come in with an offer themselves. The cash flows and property assets of Morrisons and the low valuation are bound to interest private equity players like CD&R.”
Mr Bubb said it was likely that a deal could be agreed at between 250p and 260p per share, giving Morrisons a price tag of as much as £6.3bn.
Morrisons spurned the takeover offer by CD&R late on Saturday, saying the proposal “significantly undervalued” the business and its “future prospects”. CD&R has until July 17 to make a firm offer.
A former Amazon insider said that it would be surprising if it did not look at Morrisons as a potential takeover target given its existing partnership with the supermarket chain selling its food online.
They said Amazon had previously considered expanding its grocery offering in the UK through a partnership with Marks & Spencer, and has been increasingly exploring opportunities in bricks and mortar retail. The Silicon Valley firm owns Whole Foods, which has around 500 stores in the US but just a handful in the UK.
Separately, Jon Reily, a former Amazon executive and retail expert, said: “Amazon is still not the dominant force in the space we expected it to be, and other strong brands globally like Walmart and Tesco took the challenge and have re-invented themselves.”
However, he said a swoop for Morrisons by private equity was more likely as Amazon historically does not engage in bidding wars.
Deal insiders suggested that competition could prove fierce from private equity firms. One said that very low interest rates combined with high property valuations made Morrisons a very attractive proposition for a buy-out firm. Morrisons has almost 500 stores, most of which are freeholds.
They added that interest was most likely to come from the US, due to the attractiveness of UK valuations.
Former Amazon insiders, however, said a deal with Morrisons could come at an optimal time for the technology firm and allow for it to fast-track a roll-out of its “4-star stores” in the UK – shops which sell only items that have been rated four stars or above on its website.
Richard Hyman, a partner at Thought Provoking Consulting, said: “Amazon understands that it could use more knowledge of food retailing – that is why they bought Whole Foods in the US. The idea that they could buy a food retailer in Britain has always been a possibility, and they have an existing, positive relationship with Morrisons.”
The interest for Morrisons comes amid a wider shake-up in the grocery sector, with Asda snapped up for £6.7bn earlier this year and Czech billionaire Daniel Kretinsky increasing his stake in Sainsbury’s to 10pc in April, a move which was seen by some as a precursor to a deal to take the supermarket private.
Amazon and Apollo declined to comment. Lone Star did not respond to requests for comment.
Read on for our insight into what the Morrisons takeover bid reveals about the UK grocery sector:
Private equity looks to add Britain’s supermarkets to shopping trolley
After more than a year of battling the pandemic and grappling with the subsequent shift to online shopping, Britain’s supermarkets face a new wave of disruption.
Late on Saturday, Morrisons rejected a surprise £5.5bn offer from private equity house Clayton, Dubilier & Rice (CD&R), advised by Sir Terry Leahy, the former Tesco boss.
It came just weeks after the competition watchdog gave the green light to the £6.7bn takeover of Asda by the billionaire Issa brothers, in partnership with TDR Capital.
Industry insiders believe these deals are just the beginning of a slew of interest in Britain’s supermarket sector, with potential bidders likely to set their sights on Sainsbury’s and possibly even Tesco.
Czech billionaire Daniel Kretinsky launched a raid on Sainsbury’s in April, increasing his stake to almost 10pc by buying shares worth more than £300m from Qatar’s sovereign wealth fund. The investment has sparked speculation that it could be targeted in a deal to take it private after the supermarket’s botched attempt to merge with Asda in 2019.
Britain’s supermarkets have become an attractive target for investors, particularly buy-out firms, who can see the sum of the grocers’ parts may be worth more than the business as a whole.
One industry insider suggests that Morrisons’ significant property freehold ownership and its lucrative manufacturing business – it is one of the UK’s largest producers of fresh food – is where the real value is stored.
This will not have escaped the attention of Sir Terry, who now gives CD&R its heft in the retail industry as an adviser.
Under his leadership, Tesco engaged in a series of sale and leaseback deals to unlock value from its property empire.
A former colleague says this was an obsession of the boss: “At Tesco we were often told that the property was worth more than the market capitalisation.”
One industry expert says this property value makes Morrisons a classic private equity target.
“There are a lot of assets that you can unlock on that balance sheet and you can milk it really hard, so not a surprise that private equity is looking at it,” he says.
Whether this is good for the business and its customers depends on what the new owners do with the cash thus liberated.
Tony Shiret, a retail analyst at Panmure Gordon, says the combination of low interest rates and high property prices makes this an attractive deal for the buyer, as shown with the Issa brothers’ Asda deal.
However, he is sceptical that a private equity takeover would yield benefits for the business and customers.
Nick Bubb, an independent retail analyst, says: “Customers won’t notice any difference in the short-term, but in the medium-term the worry will be, as it is with Asda, whether a private equity owner will invest enough in the business.”
He notes current management have already done “good work in developing the wholesaling arm”, and others add that there seems little prospect of the incumbent bosses being ousted in any takeover.
A City source says: “They have got an excellent management team, I would not expect any changes.”
Food for thought
If that makes it look like there is little value in a takeover except to sell property freeholds, sources note there are other ways in which the business could be grown.
“Morrisons is relatively underdeveloped in online, non-food and neighbourhood retailing,” Richard Hyman, partner at Thought Provoking Consulting, says. He says the prospect of a buyout is “relatively positive”.
An expansion into convenience retail would certainly suit CD&R, which owns Motor Fuel Group (MFG), the petrol station empire which has around 900 sites.
A tie-up to sell Morrisons’ food in a handful of MFG’s forecourts was abandoned in 2015, but full ownership of both parties could enable CD&R to give such a deal a second shot with more success.
CD&R’s track record in retail under the stewardship of Sir Terry is evidence that a bid for Morrisons could be positive for both the supermarket and its customers, Hyman says. He points to B&M, the discount retailer which Leahy chaired from 2012 to 2017, as evidence they are “serious long-term investors”. Under Sir Terry, B&M’s sales soared from £993m to £2.7bn following an ambitious expansion plan which took its estate from 331 shops to 893.
“If you look at what the consumer implications were for B&M, they have been very good,” Hyman says. “It is a very good business, it is much bigger now, and more consumers are able to benefit from it.”
“This isn’t like Asda merging with Sainsbury’s, where there were clear consumer questions to be asked.”
Sir Terry has earned a name for himself as a hands-on retailer, one industry source says, an attribute which could help him win over sceptics.
“He’ll have spotted this opportunity,” says the deal insider. His long association with Andy Higgison and David Potts, his former right hand men who are now chairman and chief executive respectively at Morrisons, will only strengthen his hand, according to the source.
He says: “The three of them were the three musketeers behind Tesco – Andy, Terry and David.”
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