WM Morrison (MRW) is in the midst of a multi-way tussle for control. An initial bid of 230p from US private equity (PE) house Clayton, Dubilier & Rice (CD&R) was rejected in late June, but days later the board accepted a bid of 254p by another PE house, Fortress. A third PE investor, Apollo, had expressed interest but chose to step aside and Candian PE player Couche-Tard (foiled in a €16bn bid for Carrefour in January) could also be interested. Meanwhile, the share price sits above the Fortress offer indicating that investors don’t think the race is run.
This is the second PE bid for a UK supermarket this year with Asda acquired from Walmart in February in a classic leveraged buyout with scant equity and lots of debt used for the purchase. Leveraged buyouts often lead to aggressive cost-cutting and stripping of assets with the PE investor looking to make a quick gain before flipping the asset on, often back onto the public market. This is how the CD&R bid looked, but the Fortress offer feels a little different. This is because a significant part of the consortium is a Canadian pension fund and this class of investor is more inclined to play a long game, looking to optimise a business rather than raid it. There have been assurances on protections for staff and the supply chain, which look to have been instrumental in securing the board’s recommendation. That said, it is hard to imagine that Morrisons' extensive freehold estate (it owns 85 per cent of its stores) will not be monetised to some extent.
But Morrisons is largely water under the bridge now with just the final ‘who’ and ‘how much’ to be settled, so speculating on how value might be wrung out is of waning interest to investors. It is more useful to consider the supermarket sector more widely, examining the issues faced and whether there are other potential targets.