Why should Wm Morrison (MRW) be worth over 240p a share on Monday 21 June, when it had closed on the previous Friday at 178p? The answer, of course, is that over the weekend word had got out about a possible 230p cash offer. It had rebuffed this because it “significantly undervalued the company and its future prospects”.
Takeover guidance
Anyone selling Morrisons shares after Monday 14 June, when the unsolicited approach was made, must have been kicking themselves. So should shareholders have been told more promptly? Lord John Lee thinks so. Earlier this year, backed by ShareSoc (where he is the patron), he lobbied for companies to let their owners (their shareholders) know as soon as possible about potential bids, even if they have to say “there can be no certainty that an offer will ultimately be made”. He had in mind Signature Aviation, which had kept investors in the dark for 10 months in 2020, during which its directors received several approaches from two or more investment groups. The lack of disclosure effectively created a false market in its shares as investors continued to trade in blissful ignorance.
Since directors have a duty to “lead, steward and serve shareholders”, are they at fault for failing to inform them better? Well, no. That’s because they have to be guided by the Takeover Panel, which says that, as long as there are no leaks, directors need say nothing until a potential buyer has “a firm intention” of making a bid. That’s what Lord Lee wants changed – but if changes are to be made, the government has said that the panel itself must make them.
Market anomalies
Leaking news of potential offers does private investors a favour, but they shouldn’t have to rely on this. It prompts a higher share price – recent examples are Avast (AVST) (when the talks with NortonLifeLock were confirmed) and Lord Rothermere’s announcement of plans to buy out the other shareholders of Daily Mail & General Trust (DMGT). Leaks can also flush out other interested parties. On 3 July, Morrisons' directors agreed to a cash offer worth 254p a share from a different US private equity group (a consortium led by Fortress Investment Group). Two days later, a third one, Apollo Global Management, confirmed that it had begun evaluating a possible offer, without indicating how much, if anything, it might be. So, if Morrisons is really worth at least 254p a share, why did institutional investors value it at so much less?
The obvious answer is that private equity pays more because it can run operations more efficiently. Fortress says it acquires “companies with strong management teams” and “empowers them to deliver their long-term strategy”. The message for Morrisons is clear: more of the same. And no, it won’t sell off its properties and lease them back. In short, it says that the management team is doing the right thing, and because it’s private equity, it can accelerate the growth.
Unbalanced
The reason is insidious: private equity can run companies more efficiently because they don’t carry the baggage that publicly listed companies do.
For a start, private equity can take on more debt while plc boards often come under pressure to keep gearing low. That amplifies the return on capital employed. Low interest rates make the cost of servicing that debt low and this cost can be set against trading profits, which reduces the corporation tax bill. Push up corporate tax rates and that will make the imbalance worse.
Secondly, having to account to shareholders adds to the bureaucracy within plcs – doing the right thing requires internal monitoring, reporting and enforcement processes (such as compliance) to make sure it’s actually being done. Private equity relies on slimmer self-governance and has lower overheads because it’s less externally accountable. Fewer committees mean faster decisions.
And thirdly, there’s the personal angle. Morrisons executives will receive a windfall – the acquisition will vest most of their outstanding share awards. Those hanging on to their jobs will find life quieter, with fewer distractions from running the business better, plus the prospect of taking home more pay: private equity executives generally have lower salaries and benefits but more generous share-type plans – and the limited partners’ share of profits (called 'carried interest') is classified as a capital gain rather than income and so attracts tax at 28 per cent, rather than 45 per cent.
So it’s not a level playing field, and it’s not surprising that about 15 UK-listed companies have gone private so far this year. Just among supermarkets, privately-owned Aldi and Lidl have been stealing market share and Asda was recently bought for £6.8bn by the Issa brothers using borrowed money. And 3i comes close with Action, a Benelux-based non-food retailer, which it bought for about €130m in 2011 and is now worth over €11bn. Maybe the institutions mispriced Morrisons because they failed to factor in a bid, which might never have materialised – but how could they have put a value on that?
