Tuesday , October 26 2021

Morrisons £5.5bn takeover bid did not ‘add genuine value’, says LGIM

Britain’s largest investor has criticised the £5.5bn takeover bid for Morrisons by a US private equity firm, saying it was “not adding any genuine value” as shares in the supermarket group rose by more than one-third.

Legal & General Investment Management (LGIM), the seventh-largest shareholder in Morrisons, raised concerns about the price of the bid from Clayton, Dubilier & Rice as well as the possibility that the suitor could try to sell its shops to generate cash.

Shares in Morrisons surged by 35% on Monday, after the chain rebuffed the offer, potentially sparking a bidding war.

The price move was spurred by news over the weekend that Morrisons, which employs about 120,000 people in the UK, had become a takeover target, making the Bradford-based supermarket group the top FTSE 250 riser on Monday morning, the first opportunity to trade shares after the approach was made public.

Andrew Koch, a senior fund manager for active equities at LGIM, said: “The sector generally looks undervalued, and private equity look to be interested in Morrisons partly because it has a lot of freehold property, which they would ‘sale and leaseback’ to generate cash to pay back to themselves.

“That’s not adding any genuine value, and the company could do that themselves. So I would personally not expect a bid to succeed at that level.”

The potential for property sales and leasebacks has been highlighted by many analysts as a key rationale for the bid. The grocer owns the freehold for 85% of its 497 stores, and prides itself on its 19 manufacturing sites including bakeries, abattoirs, fishing fleets and egg farms.

Similar moves are often used by private equity investors to generate returns, but can be controversial if the money is used to pay dividends to shareholders rather than reinvested in the business.

LGIM owns 2.7% of Morrisons, according to S&P Global Market Intelligence. The investor has been increasingly vocal on takeovers and other corporate governance issues such as the meal delivery company Deliveroo’s stock market listing.

The bid for Morrisons prompted shares to rise in the rest of the sector, as traders bet that other supermarket groups could become targets of private equity interest. Ocado and Sainsbury’s were the biggest gainers on the FTSE 100 on Monday, with shares rising by 4% and 3.8% respectively. Tesco shares rose 1.7% and Marks & Spencer was up 2.8%.

However, Labour has raised concerns over the prospect of further private equity takeovers of UK businesses, saying firms tend to swoop in and pocket the dividends, while cutting jobs and leaving their acquisitions loaded with debt. Reports suggest the Morrisons board would seek assurances from any potential buyers that its workers, manufacturing operations and pensions scheme would be protected.

Morrisons said on Saturday it had rejected a preliminary bid by CD&R because it “significantly undervalued Morrisons and its future prospects”. CD&R had offered to pay 230p a share in cash. Morrisons’ share price closed at 178.45p on Friday, but rose to 235p on Monday morning, valuing the company at £5.7bn.

The private equity firm has until mid-July to make another offer or walk away, meaning it could table a more lucrative offer to convince Morrisons bosses to recommend that investors sell the business. CD&R counts Sir Terry Leahy, the former Tesco chief executive, as a senior adviser.

Analysts have speculated that other bidders, including rival private equity firms or the massive retailer Amazon, could put their hat in the ring and spark a bidding war for the UK’s fourth-largest grocer.

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Another offer by CD&R appeared likely, said analysts led by Thomas Davies at Berenberg, an investment bank. However, any deal could face regulatory scrutiny from competition authorities over the provision of fuel because of CD&R’s stake in the UK’s biggest forecourt operator, Motor Fuel Group. Asda received similar scrutiny when it was taken over this year by private equity-backed investors.

Berenberg added that the interest could benefit the rest of the supermarket sector, which has struggled on the stock market in the past year despite increased sales during the pandemic.

“We expect the offer to have positive read-across to the rest of the UK grocery space, as the UK grocer’s relatively cheap valuations and cash generation may appear increasingly compelling to the private markets,” the analysts wrote in a note to clients.

Analysts said bidders were partly interested in Morrisons because of its relatively small online presence – it has a delivery partnership with Amazon – which gives it more room to grow rapidly.

Quick Guide

Bids for UK companies from private equity firms since start of Covid crisis

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The US private equity group Clayton, Dubilier & Rice’s unsolicited – and swiftly rejected – takeover approach for the supermarket chain Morrisons is the latest in a flurry of bids for UK firms from private equity firms since the start of the pandemic.

Asda

The billionaire brothers Mohsin and Zuber Issa acquired a majority stake in the supermarket chain with TDR Capital, in a £6.8bn leveraged buyout.

UDG Healthcare

The FTSE 250 pharmaceutical industry services group agreed a £2.6bn takeover offer from Clayton, Dubilier & Rice in May.

LV=

The life insurer originally known as Liverpool Victoria agreed to sell itself to Bain Capital in a £530m deal.

Vectura Group

The British pharmaceutical company focused on inhaled medicines agreed a £958m takeover by the global investment firm the Carlyle Group in May.

John Laing

In May, KKR agreed to buy the UK infrastructure investor in a deal valued at about £2bn.

St Modwen

The property investment and development group has agreed to be taken over by Blackstone in a £1.2bn deal. 

McCarthy & Stone

The retirement homes specialist accepted a takeover offer worth about £650m from Lone Star in 2020.

Wolseley

CD&R completed the £308m acquisition of the plumbing and heating firm in February. 

AA

The roadside assistance group agreed to a £219m takeover offer from TowerBrook and Warburg Pincus, who also agreed to invest £380m into its large debt pile.

Aggreko

The power equipment provider accepted a £2.3bn takeover bid from I Squared Capital and TDR Capital in March.

Bourne Leisure

Even Butlins has been caught up in the private equity frenzy, with Blackstone acquiring its owner, Bourne Leisure, earlier this year.

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