The surge increased more than £1 billion to the group’s market value after Sky News published details of the bid from US buyout firm Clayton Dubilier & Rice (CD&R) over the weekend.
As investors absorbed the ramifications of the approach for the broader grocery sector, rivals Sainsbury’s and Tesco also climbed, gaining almost 4% and 2%, respectively.
Meanwhile, Labour is concerned about the possibility of another British supermarket being absorbed up in a private equity deal after the sale of Asda to a group led by the wealthy Issa brothers.
There are further speculations of Amazon getting interested in the deal, but there is nothing concrete as yet. Meanwhile, investors wanting to buy Amazon shares UK cannot have a better time to do it, as the online giant has been posting amazing returns since the pandemic struck.
Morrisons disclosed CD&R’s offer of 230p per share on Saturday but claimed it “significantly undervalued Morrisons and its future prospects” and had rejected it last week.
Clayton, Dubilier & Rice’s offer for Wm Morrison has been slammed by the UK’s largest asset manager, who claims the private equity firm “would not be adding any genuine value” to the grocer with its takeover.
According to LGIM, Morrisons’ £5.5 billion takeover offer did not “bring genuine value.”
As shares in the supermarket chain soared by more than one-third, Britain’s largest investor slammed a £5.5 billion acquisition proposal for Morrisons by a US private equity firm, saying it was “not adding any genuine value.”
Legal & General Investment Management (LGIM), Morrisons’ seventh-largest stakeholder, expressed reservations about the price of Clayton, Dubilier & Rice offer, as well as the prospect that the suitor may try to liquidate its stores to acquire funds.
Morrisons’ stock jumped 35% on Monday after the supermarket chain turned down the offer, potentially igniting a bidding war.
The move was sparked by reports that Morrisons, which employs approximately 120,000 people in the UK, had become a takeover target over the weekend, making the Bradford-based grocery business the top FTSE 250 climber on Monday morning, the first trading chance after the approach was made public.
Andrew Koch, a top 10 stakeholder in Morrisons and a senior fund manager for active stocks at Legal and General Investment Management, thought the buyout firm’s offer was too low. Morrisons was contacted by CD&R last week with a 230p-a-share offer, valuing the UK’s fourth-largest supermarket business at £8.7 billion.
“The [retail] sector generally looks undervalued, and private equity looks to be interested in Morrisons partly because it has a lot of freehold property which they would ‘sale and leaseback’ to generate cash to pay back to themselves. That’s not adding any genuine value, and the company could do that themselves. So I would personally not expect a bid to succeed at that level.”
Morrisons should avoid succumbing to another depressing takeover battle
According to the Guardian’s Nils Pratley, Andrew Higginson, Morrisons’ chair, needs to sound more outraged if he wants to fight for independence, or even simply a reasonable price. The late Sir Ken Morrison would be seething with rage by now, rallying shareholders to acknowledge Morrisons’ intrinsic virtues. The few boilerplate remarks that came out of Bradford headquarters over the weekend were far too cautious.
If shareholders prefer sale-and-leaseback arrangements, Higginson might attempt modelling them himself. Prepare a report on the property portfolio, including its farms, at the very least. Also, contact Amazon to see whether it’s interested in purchasing an equity position as part of its online collaboration agreement. The company’s CEO, David Potts, might help by commenting on his previous remarks about a “renaissance” in UK supermarkets. What does he believe it implies for dividends in the long run? Create a few scenarios to shift the attention away from the market’s negative assessment of the whole grocery industry.
Berenberg analysts projected that if CD&R paid 270p per share, it would still be able to generate a 19 percent internal rate of return. Morrisons’ board of directors should view this as a challenge. Don’t be misled by fictitious big takeover premiums or cheap capitulation. Morrisons is a successful company, and its independence fits it well.
However, according to the Financial Times, the private equity company was planning to pursue the deal, and there was speculation that the offer might ignite a bidding war with other private equity companies – even Amazon, which already has an online alliance with the grocer.
At the close of trade on Friday, the company shares had closed at just over 178p, giving it a slightly over £4.3 billion market value.
It rose to more than 236p in early trade on Monday before closing at 228p. Its value appreciated to more than £5.5 billion as a result of the spike.
“As noted by the FT today, CD&R isn’t going away and we suspect a deal can be done in the 250p-260p area, so it should be a lovely day for the sector on the stock market today, with an additional focus on the bid potential for Sainsbury and Tesco as well,” said Nick Bubb, an independent retail analyst.
The acquisition of competitor Asda by a group led by billionaire gas station entrepreneurs Mohsin and Zuber Issa and private equity company TDR Capital was authorized by the UK competition authority last week.
Meanwhile, in April, Czech billionaire Daniel Kretinsky increased his investment in Sainsbury’s to over 10%, igniting talk of a possible takeover.
Labour’s shadow business and consumer minister, Seema Malhotra, said supermarkets in the UK had “stepped up to serve communities during the pandemic” and that they needed “owners that put the long-term interests of the business and its employees first”.
“When Debenhams went bust we saw private equity firms walk away while employees lost their jobs and staff who had paid into the pension scheme were left out of pocket.
“Too often dodgy private equity firms load the companies with debt and leave while pocketing the dividends. This has to end.” She added.
Barclays analysts said the initial proposal was unlikely to be the maximum CD&R could justify paying, but warned that Morrisons’ board may struggle to persuade the market that the company can retain its share price at 230p or above.
The stock has dropped 3% in the last year, and the board is still suffering from a recent boardroom pay squabble.
Morrisons is more of a northern retail chain, has a less affluent customer base than Amazon’s core, and has a restricted number of convenience shops, according to Barclays, so prospects of an Amazon takeover may be unduly optimistic.
According to property industry insiders, the US private equity firm may be considering selling off some of Morrisons’ large property holdings.
The firm has kept most of its stores rather than selling and leasing them back, as a legacy of its powerful late chairman Sir Ken Morrison.
It owns about 85% of its properties, which is substantially greater than Sainsbury’s and Tesco, which both have mid-60% ownership.
Analysts believe CD&R will sell at least some of them to quickly regain cash. If Apollo made its own bid, it could do the same thing or simply maintain the properties as an investment asset.
According to the most recent appraisal in 2015, Morrisons’ properties were worth more over £8 billion, according to Barclays.
CD&R considers itself to be at the “aristocratic” end of the private equity sector, and will have been alarmed by reports in the UK media that it was planning to fire Morrisons employees and liquidate the company’s assets. “Private equity vultures” were blasted in a recent newspaper headline.