William Morrisson probably could not have imagined it when he started in 1899 with a simple egg and butter stall on the market in Bradford, UK. Three American private equity parties that more than 120 years later are competing for his company with billions of pounds.
A major takeover battle is currently raging in the United Kingdom for supermarket chain Morrissons. Foreign venture investors who have been hunting for bargains throughout the corona crisis, see the company with a lot of own real estate as a profitable investment. The billions of bids have followed one another in recent weeks. Now British politics is getting involved.
It started in mid-June with an unsolicited attempt by private equity firm Clayton, Dubilier & Rice. Their takeover offer worth 5.5 billion pounds (more than 6 billion euros) was almost immediately rejected by Morrisons’ management: too low.
What the Americans did not know at the time is that the company was already in talks with another private equity investor. The Fortress, co-financed by the Japanese Softbank, carefully coordinated its offer with the board of Morrisons. They therefore accepted the offer price of 2.52 pounds per share (converted 7.3 billion euros in total). In a letter, the Americans assured investors and employees that they will maintain employment as much as possible. The board of directors can also stay for the time being.
The question is how many shareholders will actually subscribe for this price. On Tuesday, one Morrissons share was worth £2.65 on the London Stock Exchange. An indication that investors believe there is more in the pipeline. Analysts estimate that the actual selling price could be £2.80 per share.
That hope was nurtured early last week when a third party came forward. The American private equity investor Apollo also announced that it was also preparing an offer. Two years ago, Apollo was also in the running to take over another supermarket, Asda. That didn’t work then.
Own fishing fleet, meat factory
Morrisons may legally withdraw support for Fortress’ offer if a more attractive partner presents itself. Clayton, Dubilier & Rice has now also announced that it is considering a higher price per share. According to insiders that newspaper The Guardian quotes, that last batch would have “still quite a bit in the tank”.
What makes the Morrisons acquisition so special? First of all, it is a major player in the UK market in terms of revenue. With a turnover of 20.5 billion euros in 2020 and 110,000 employees, Morrisons is the fourth largest supermarket in the country, after Tesco’s, Sainsbury’s and Asda. The company has a market share of 10.1 percent, compared to 27.1 percent of market leader Tesco.
Morrisons also has a large share of its own food production. It owns several meat processors as well as its own fishing fleet. As a result, a significant part of the shelves is fresh and produced in-house. Other larger chains in the UK are much more dependent on external deliveries and thus have less impact on price.
Morrisons is also seen as a bargain. While many supermarkets benefited from Britons cooking more at home during the corona pandemic, the costs for safe shopping also rose. This led to falling share prices. Until the bidding war erupted, Morrisons’ price was still at that lower level.
The uncertainty surrounding Brexit has also weighed on prices in recent years. It also weakened the British pound against the US dollar. In other words, you could buy more for a dollar. This year alone, more than £23 billion worth of British companies have been acquired. That is the fastest year-on-year increase since 2007, calculated data company Dealogic.
Analysts assume that the market value of the supermarket chain is therefore on the low side. Especially given that Morrisons owns 85 percent of the properties of his nearly five hundred supermarkets. It is a gold mine for private equity parties. They can borrow a significant part of the acquisition price and repay it with the income from the sale of properties.
Meddling British politics
It is one of the reasons that British politics has become involved in takeovers. State Secretary for Business Kwasi Kwarteng said last week that he would like to talk to the Morrisons management. He fears that acquisitions of companies will fill them with debt. It could lead to cost savings through reorganisations and thus to layoffs.
Some shareholders tried to reassure Kwarteng and unions. “If a buyer wants to make a profit, it has to come from improving business processes,” assured Andrew Koch, who manages a nearly 3 percent stake in Morrisons on behalf of LGIM. “And not through a property portfolio bought too cheaply, by taking on large debts and pocketing tax benefits.”
The coming weeks will show who will be the new owner of the supermarket chain. Due to takeover rules, Clayton, Dubilier & Rice has until the end of this week to come up with a higher offer.