Why did the Morrisons share price explode this week?

The Morrisons share price soared this week following a takeover offer from a private equity firm. Zaven Boyrazian takes a closer look.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The Morrisons (LSE:MRW) share price exploded this week, moving from 178p to 240p within the first hours of trading on Monday. That’s a 35% jump – quite impressive for a supermarket chain!

Since the surge, the stock has remained relatively stable. And this recent momentum has helped push the 12-month performance to around 25%. But the question remains. What caused this sudden rise in the Morrisons share price? Let’s take a look.

A rejected takeover offer

There’s a relatively short list of events that can trigger such a massive upward swing in a company share price. Generally, these are caused by expectation-beating earnings reports, or in the case of Morrisons, a takeover bid. US private equity firm Clayton, Dubilier & Rice (CD&R) recently made an offer of 230p per share. But after consideration, the board of directors unanimously rejected it.

This decision was based on the board’s opinion that the “Conditional Proposal significantly undervalued Morrisons and its future prospects.” In other words, the management team believes the Morrisons share price can climb a lot higher than 230p.

But this isn’t the end of the story. CD&R has until 17 July to make another more tempting offer to both the Morrisons board and shareholders. Meanwhile, other firms may enter the arena, potentially sparking a bidding war. Needless to say, if this were to happen, the Morrisons share price would likely continue to climb to reflect the potential offers.

The Morrisons share price has its risks

What’s next for the Morrisons share price?

While the prospect of a potential buyout is alluring, it’s important to remember it may not happen. And should a higher bid fail to emerge, the Morrisons share price could fall just as quickly as it rose.

Personally, I remain pretty sceptical of a bid emerging from another prospective buyer. There aren’t that many private equity firms with almost £6bn of cash lying around to outright purchase one of the biggest supermarket chains in the UK. What’s more, while there’s speculation that other retailers like Tesco or Sainsbury’s may make an offer, I highly doubt regulators would allow the transaction to proceed on anti-competition grounds. This actually happened when Sainsbury’s and Asda tried merging in 2019.

Under the assumption that no takeover takes place, can the Morrisons share price climb higher? Over the long term, I think it’s possible. The grocery retail industry is undergoing some disruption from discounters like Aldi and Lidl, and online delivery services like Ocado. However, Morrisons appears to be adapting relatively well by lowering its prices, as well as offering home delivery solutions.

As a result, the business has managed to essentially retain its market share over the past four years. And while I doubt any explosive growth is on the horizon, its historical 4% dividend yield looks like it could be an attractive addition to my income portfolio.

Having said that, I’m keeping Morrisons on my watch list for now. If I’m right and another takeover bid fails to emerge, then the subsequently falling Morrisons share price could be an opportunity to snatch up some shares at a discount.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended Morrisons. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing For Beginners

Up 31% in a month, could this FTSE 250 stock be getting bought out?

Jon Smith takes a look at speculation that's pushing the share price of a FTSE 250 share higher and considers…

Read more »

Investing Articles

Here’s how I’d follow Warren Buffett to start building passive income in 2025

Ben McPoland highlights one FTSE 250 firm with a strong competitive edge that he thinks can continue rewarding investors with…

Read more »

Investing Articles

Burberry shares: undervalued FTSE gems that are ready to rocket?

Burberry shares soared at the beginning of the week as the takeover rumour mill went into overdrive. Is Paul Summers…

Read more »

US Stock

Here are the latest share price forecasts for S&P 500 giant Amazon

Amazon has generated monster gains for investors over the last decade. And Wall Street analysts believe the S&P 500 stock…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

2 high-yield FTSE 250 shares I’d buy today — and 1 that I’d avoid

UK markets have felt some volatility after last week’s Budget and the FTSE 250 was no stranger to it. Our…

Read more »

Investing Articles

3 reasons the Rolls-Royce share price could soar over the next decade

Sustainable aviation fuel, narrow-body aircraft, and small nuclear reactors could all keep the Rolls-Royce share price climbing over the next…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Here’s how much income I’d get if I invested my entire £20k ISA in cheap BT shares

BT shares are on the up but still cheap, while the FTSE 100 telecoms stock offers a good yield too.…

Read more »

Investing Articles

2 FTSE dividend shares yielding more than 6% with P/Es of less than 9!

Harvey Jones picks out two brilliant FTSE 100 dividend shares that yield more than 6% but are selling at strangely…

Read more »