Jul 5, 2021
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Morrisons recommends latest private equity takeover bid

Jul 5, 2021

The potential takeover of Morrisons, the UK supermarket giant that owns the growing Nutmeg clothing brand, has come a step closer with the retailer’s board having recommended a new offer.

Photo: Sandra Halliday

Morrisons’ board at the weekend recommended a £6.3 billion bid from a consortium of investment groups led by Softbank-owned Fortress. Also involved are Canada Pension Plan Investment Board and Koch Real Estate Investments.

But that doesn't mean the latest bidder to enter the fray will be the eventual winner as three private equity groups are interested in acquiring the company that's one of the ‘big four’ UK supermarket operators.

The story so far is that nearly two weeks ago, Clayton, Dubilier & Rice (CD&R) made a £5.52 billion approach that was rebuffed. Despite the rejection, it set alarm bells ringing in some quarters with concerns that another of the major UK supermarket operators could fall into private equity hands after Asda's recent takeover. Politicians, trade unions, and other groups were seeking assurances on a number of fronts if a private equity deal were to go through. For instance, MPs have called for any deal to be “closely scrutinised” in order to protect jobs and pensions.

Their fears come after the failure of some UK retailers in private hands that have led to major job losses and issues with company pension fund black holes.

The offer that the board has recommended would see Fortress paying 252p per share plus a 2p special dividend, which is well above the roughly180p the shares have traded at for most of this year. But the shares reached 267p on Monday morning, suggesting that investors expect a bid battle, despite the recommendation of the latest bid.

They could be right, given that New York-based investment giant Apollo also said on Monday it’s mulling a bid. It said it’s “in the preliminary stages of evaluating a possible offer for Morrisons”.

It’s unclear whether a bid will happen or whether CD&R will come back with a higher offer. But assuming one of the private equity groups eventually wins the prize, it would be the biggest private equity takeover of a UK firm since Boots was bought for £11 billion as far back as 2007.

When the bidding kicked off with that proposal from CD&R, the Morrisons board said it was too low. The offer it has accepted includes a £6.3 billion purchase price plus £3.2 billion of net debt, easily trumping the CD&R price.

The board and current bidders are clearly aware of concerns over what might happen to the business under private equity control and Morrisons chair Andrew Higginson said: “We have looked very carefully at Fortress’s approach, their plans for the business and their overall suitability as an owner of a unique British food-maker and shopkeeper with over 110,000 colleagues and an important role in British food production and farming.”

Fortress has apparently pledged to retain the Bradford HQ and keep the current management team in place. It’s also said to be “fully supportive” of the recent pay rise to £10 an hour for shop floor workers.

And it said it doesn’t have plans for the process popular among private equity companies of selling and leasing back the chain’s properties. Morrisons owns most of the properties that house its stores and such companies are often hugely attractive to private equity bidders because of the quick profit that can be made on selling those properties. But such quick returns usually leave the retailers with huge future rents bills. 

Fortress managing partnerJoshua Pack said: “We believe in making long-term investments focused on providing strong management teams with the necessary flexibility and support to execute their strategy in a sustainable and value-enhancing manner. We fully recognise Morrisons’ rich history and the very important role Morrisons plays for colleagues, customers, members of the Morrisons pension schemes, local communities, partner suppliers and farmers.”

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