Over the weekend, Morrisons (LSE:MRW) made headlines as it seems private equity firm Clayton Dubilier & Rice (CD&R) had made an offer to buy the group. But the proposal, valuing the supermarket at £5.5bn, has been rejected.
Is a bidding war about to start?
Morrisons has long been subject to takeover rumours. Since it linked with Amazon, there have been speculation that Amazon could buy it. Moreover, the grocery sector is a popular space for cash generation and repeat business. So this is enticing private equity to the table. And it’s not the first major deal in the sector to emerge.
Two years ago, J Sainsbury and Walmart’s Asda attempted to merge into a £15bn behemoth, but the Competition and Markets Authority (CMA) blocked it. Walmart later sold Asda to a consortium for £6.8bn.
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CD&R has a history of acquiring significant retailers. It gradually sold a 60% stake in B&M Retail, accruing around £1.5bn. Through its funds it owns Motor Fuel Group, it’s begun selling out of SmileDirectClub, and recently moved to buy UDG Healthcare for £2.6bn. So if it wants Morrisons badly enough, it could come back with a better offer.
Meanwhile, other private equity firms may start circling. For instance, 3G Capital recently failed in its takeover bid of Unilever and may be looking for another big deal.
Morrisons seems a lucrative target. Its origins date back to 1899, it’s a credible business, a major private-sector employer, and makes more than half the fresh food it sells. It has a loyal following and ramped up its home delivery initiative after the pandemic hit. Altogether, Morrisons knows the retail food space very well, and I think it will continue to thrive.
Could Sir Terry Leahy return?
The interesting twist in CD&R’s bid is that former Tesco CEO, Sir Terry Leahy, is a senior advisor to the firm. And Morrisons’ current executive leaders reported to Leahy when they worked at Tesco. So there are already relationships they may be looking to cultivate.
Sir Terry is the brains behind the Tesco Clubcard and its powerhouse of consumer data. He also shaped the wider strategy that made Tesco the grocery market leader.
Value hidden in plain sight
CD&R’s offer of 230p a share is a 27% increase on its current price. However, Morrisons rejected that on Saturday, saying it’s far too low.
Nevertheless, this could be enough to boost investor confidence, and Morrisons would therefore be subject to a short squeeze in the coming days. That’s because it’s seen rising short interest, and last week it was the fifth most heavily shorted UK stock.
It will be the little-known deep value fund Silchester that will probably have the most significant say in any potential deal for Morrisons. According to the London Stock Exchange, Silchester increased its shareholding in the FTSE 250 supermarket to 15% last week.
Morrisons’ price-to-earnings ratio (P/E) is 44, but its forward P/E is a more reasonable 12, and its dividend yield is 4%.
It doesn’t come without risk and has considerable debt. The high short interest indicates a bearish stance, and grocery is hugely competitive. Nevertheless, I like Morrisons both as a place to shop and as an investment, and this news reaffirms that. I’m considering buying Morrisons shares for its long-term prospects, not for a quick acquisition profit, but I’ll be watching this space with interest.
