Shares in listed supermarkets rocketed yesterday as investors geared up for a bidding war over Morrisons.
The huge rally follows a shock £5.5billion bid for the UK’s fourth- largest grocer, from New York-based private equity firm Clayton Dubilier & Rice (CDR).
Morrisons, which rose by more than 30 per cent, rejected the 230p per share offer, saying it ‘significantly undervalues’ the company and its prospects.
On a high: Morrisons, led by boss David Potts (pictured), rejected a 230p per share offer from Clayton Dubilier & Rice (CD&R), saying it ‘significantly undervalues’ the company
And Legal & General, a top 10 shareholder, said it would not add ‘genuine value’. But CDR is said to be preparing for another go, with other suitors waiting in the wings.
Internet shopping giant Amazon could gatecrash the process, while private equity firms Lone Star and Apollo previously bid for Asda.
Amid all the fevered speculation, investors were licking their lips as shares in Morrisons closed 34.6 per cent or 61.75p higher at 240.2p.
That was above CDR’s 230p per share offer price, a sign that the race to buy Morrisons has some way to go.
Barclays analysts said: ‘Our inclination is to think the offer is unlikely to have been pitched at the maximum it could justify paying. We think the story is unlikely to have ended with Morrisons’ rejection.’
Rivals Sainsbury’s also finished 3.8 per cent higher at 270.1p, Marks & Spencer added 2.8 per cent at 152.75p and Tesco was up 1.7 per cent, to 225.6p.
If Morrisons is snapped up by private equity, it would be the latest major British business to be taken off the public markets.
Others sold during the pandemic include Asda, the AA and even the owner of Butlin’s, triggering fears for jobs and transparency.
Morrisons bosses are ‘happy to continue as a plc’ but also believe every company is for sale at the right price.
They have already put together a defence strategy with help from advisers at Rothschild, due to previous warnings that the supermarket’s relatively low share price left it vulnerable to takeover.
Under UK takeover rules, potential suitors now have until July 17 to announce an intention to bid or walk away.
Russ Mould, investment director at AJ Bell, said: ‘The market value of Morrisons had weakened so much that it clearly triggered some alerts in the private equity space to say the value on offer was looking much more attractive.
The issue now is how the big shareholders respond and whether they – and the Morrisons board – feel they can squeeze out a higher bid or feel sufficiently confident in Morrisons’ position to spurn the offer altogether.
‘The market seems confident that the suitor will have to raise its offer or someone else might step into the game and we’ll see a bidding war.’ The groceries 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 many properties and the relatively poor performance of UK stocks has sparked attention.
L&G senior fund manager Andrew Koch said he did not expect CDR to succeed unless it increased its bid. CDR is thought to have spotted an opportunity in Morrisons’ small position in convenience groceries.
It already owns petrol station operator Motor Fuel Group, which has 900 forecourts in the UK, and analysts believe it could seek to put a Morrisons store in every one.
Former Tesco boss Sir Terry Leahy is an adviser and is thought to have played a key role cooking up CDR’s plans. If CDR buys the supermarket, it is understood Leahy would be chairman.
Predators 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 Clayton Dubilier & Rice’s (CDR) bid.
Amazon has a grocery deal with Morrisons, offering customers same-day delivery. But it has previously bowed out of takeover battles – unwilling to pay too high a price. Investors’ hopes of a bidding war were tempered by fears that private equity firms could weaken Morrisons’ long-term prospects.
A buyer could look to buy Morrisons and rake in a quick return by selling its properties, leaving it vulnerable in any downturn if it struggled to pay its rent. Private equity firms are also known for loading debt onto companies to boost their profits when they sell them, usually around five years later.
Like Debenhams, which collapsed in December 2020, this can leave a business struggling to pay off debts if the economy sours. Labour MPs fear a private equity buyer could slash staff numbers to cut costs.
In the UK David Novak is the head man at CDR which has previously snapped up discount retailer B&M. Consultant Richard Hyman said CDR had helped B&M grow, adding: ‘It is a very good business.’
CDR is also set to buy Dublin-based UDG Healthcare, whose shares are already listed in London, for £2.6billion.