A bidding war could break out for Wm Morrison Supermarkets PLC (LON:MRW), despite the supermarket chain’s board recommending acceptance of the offer from Fortress Investment.
The Morrisons board, which sent Clayton, Dubilier & Rice (CD&R) away with a flea in its ear last month after the private equity group proposed what Morrisons deemed a low-ball offer of 230p a share, has come out in favour of a 254p per share (which includes a 2p special dividend) offer from a consortium led by Fortress Investment Group.
The terms value Morrisons at £6.3bn, although any successful bidder would also take on Morrisons’ debt of £3.2bn.
However, another private equity firm with cash burning a hole in its pocket, Apollo Global Management, has confirmed it is in the preliminary stages of evaluating a possible offer for Morrisons.
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If Apollo comes up with a better bid it would continue a recent trend of British companies failing to extract the best price from private equity. The basic rule of thumb seems to be if private equity tells you your company is worth “X”, it’s probably worth “X++”.
Examples of companies whose boards were forced by obdurate shareholders to admit they accepted low-ball offers include UDG Healthcare and St Modwen.
When the CD&R bid was rebuffed, one major Morrisons shareholder, J O Hambro, was reported as saying a valuation of at least £6.5bn would be needed if the bid is to succeed.
Independent veteran retail analyst Nick Bubb has speculated that a deal could be done “in the 250p-260p area” so there is every chance the Morrisons directors have left some money on the table.
If they have, that would put them back in the City’s bad books barely a month after the board ignored a massive vote against the top brass’s 2020 bonus package.
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Morrisons is one of the largest private-sector employers in the UK with 118,000 staff at almost 500 stores, so the government may be under pressure to intervene in a potential deal to protect jobs.
The Morrisons board has tried to head this threat off at the pass by exacting assurances that the bidders would recognise the legacy of the group’s founder, Sir Ken Morrison; Morrisons' history and culture; and” the important role that Morrisons plays for all stakeholders, including colleagues, customers, members of the Morrisons Pension Schemes, local communities, partner suppliers, British farming and the wider British public”.
Such assurances are supposed to be binding under the City’s takeover code but then again, Kraft Heinz offered similar assurances when it acquired British confectioner, Cadbury – a company with an even more socially significant culture and history than Morrisons – in 2010 and those assurances lasted a matter of months before being abandoned and there was nothing Parliament could (or maybe “would”) do about it.
Quite possibly the assurances that the Morrisons’ top brass cares about is the one that says the existing management will be left in place to run the business.
According to the latest Kantar data, Morrisons holds a 10.1% market share in the UK, with sales totalling £3.1bn in the 12 weeks to 14 June, which was 1.5% lower than the same period last year but 8.9% higher compared to 2019.
Morrisons has 87% freehold ownership across its estate, making its asset base a very tempting target for any buyer, although Fortress has denied it has plans for a significant amount of sale & leaseback activity – the practice where the company sells the asset and then leases the use of the property from the new owner.
Another incentive for private equity firms to plunder UK companies is a tax loophole that has yet to be closed. “Carried interest” is the term used for the part of the profit from an investment that partners and senior managers in the private equity firm retain as a bonus; “carried interest” is treated as capital gains and is therefore taxed at 28% as opposed to income, where the top tax band is 45%.
In summary, the agreed bid from Fortress is at a level that might get grudging support from City institutions but it is hardly a knock-out blow and a counter-bid looks probable based on the current share price of 266.1p, up 11% on the day.