Morrisons leaps after $7.6 billion private equity offer rejected

LONDON (Reuters) -Shares in Morrisons surged by as much as a third on Monday on hopes that U.S. private equity firm Clayton, Dubilier & Rice (CD&R) might raise its proposed offer for the British supermarket group or flush out other bidders.

Morrisons, Britain’s fourth-largest grocer by sales behind market leader Tesco, Sainsbury’s and Asda, said on Saturday that it had rejected a proposed 5.52 billion pounds ($7.62 billion) cash offer from CD&R.

The approach underlines private equity’s growing appetite for supermarkets in Britain, attracted by their steady cash generation and freehold real estate assets.

Morrisons said CD&R’s offer of 230 pence per share, a 29% premium to Friday’s closing price, “significantly undervalued” the group and its prospects. Including net debt of 3.17 billion pounds, CD&R’s offer price gives Morrisons an enterprise value of 8.7 billion pounds.

Shares in Morrisons were up 57.75 pence to 236.3 pence at 1351 GMT, as some analysts said they expected CD&R to assess investor reaction before deciding on its next move.

Under British takeover rules CD&R, which has former Tesco boss Terry Leahy as a senior adviser, has until July 17 to announce a firm intention to make an offer or walk away.

Shares in rivals Tesco, Sainsbury’s and Marks & Spencer rose as much as 3.2%, 5.7% and 4.1% respectively on hopes that the whole sector could be in play, analysts said, adding that some short sellers were also closing out positions.

Silchester and Columbia Threadneedle, Morrisons’ two largest investors, which Refinitiv data showed having stakes of 15% and 7.4% respectively, both declined to comment.

In addition to the possibility of other private equity players entering the fray there has long been speculation that online shopping giant Amazon, which has a partnership agreement with Morrisons, could emerge as a possible bidder.

An Amazon spokesperson declined to comment.

Analysts said Morrisons was attractive to private equity because it owns 85% of its nearly 500 stores. It is also unique among British supermarket groups in making over half of the fresh food it sells. It has 19 mostly freehold manufacturing sites.

With a staff of 118,000, Morrisons is one of the country’s biggest private sector employers.

Britain’s opposition Labour Party warned on Sunday that a private equity acquisition of Morrisons could put jobs at risk.

A spokesperson for Prime Minister Boris Johnson declined to comment.

Shopworkers union Usdaw, which represents Morrisons staff, also had no comment.

NOT RECOGNISING VALUE

Industry executives and some sector analysts believe the stock market has failed to recognise the inherent value in Britain’s listed supermarket groups.

They argue that if equity markets do not value them appropriately, acquirers will.

“Investors want a very binary story about knuckling down, keeping capex to a minimum and just becoming a cash machine,” one senior supermarket executive told Reuters.

The executive said it was possible that even Tesco, with an equity market value of 17.3 billion pounds, could receive an approach.

Petrol station billionaires Zuber and Mohsin Issa joined forces with private equity firm TDR Capital to buy a majority stake in Asda from Walmart in a deal valuing the group at 6.8 billion pounds.

That deal completed in February and followed the competition regulator’s blocking of Sainsbury’s takeover of Asda in 2019.

In April, Czech billionaire Daniel Kretinsky raised his stake in Sainsbury’s to almost 10%, igniting bid speculation.

Shares in both Morrisons and Tesco closed below their pre-coronavirus pandemic levels on Friday.

While sales have soared at all British supermarket groups during the coronavirus crisis, their profits have fallen sharply because of the huge extra costs incurred.

($1 = 0.7243 pounds)

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