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Three US private equity groups circle UK supermarket

Three US private equity groups circle UK supermarket

Posted: Jul 5, 2021 11:40 AM
Updated: Jul 5, 2021 11:40 AM

Morrisons has become a takeover target for three major American private equity groups amid strong investor appetite for UK assets that could spark a bidding war for Britain's fourth biggest supermarket chain.

In a statement on Saturday, Morrisons said that its board would recommend a sale to investors led by SoftBank-backed Fortress Investment Group that values the company at £6.3 billion ($8.7 billion).

The announcement comes just two weeks after the grocery retailer rejected a separate bid from Clayton, Dubilier & Rice, which valued it at £5.5 billion ($7.6 billion). The private equity group declined to comment Monday on whether it intends to table a second offer.

But the action may soon heat up. Apollo Global Management confirmed that it too is mulling a bid for Morrisons. "There can be no certainty that any offer will be made," the company said in a statement on Monday, adding that it has not yet approached the Morrisons board.

Shares in Morrisons surged more than 11% in London on Monday to £2.66 ($3.69), topping the £2.52 ($3.49) per share in cash offered by Fortress. That suggests that investors expect a higher bid to be made.

"With a trio of hungry firms circling, it shows there is a big appetite for a bite of the UK supermarket sector," Susannah Streeter, a senior investment and markets analyst at Hargreaves Lansdown, said in a note on Monday.

In October, Walmart sold supermarket chain Asda to European private equity group TDR Capital and the founders of a global convenience store business. Separately, Czech billionaire Daniel Kretinsky recently increased his stake in supermarket chain Sainsbury's to 10%, adding to speculation that it could be the next takeover target.

Buyout groups have also been targeting other UK companies whose share prices have been weighed down by the pandemic and Brexit.

Home builder St. Modwen Properties agreed to a £1.25 billion ($1.7 billion) offer from Blackstone in June to take it private, while KKR is buying British infrastructure investor John Laing in a £2 billion ($2.8 billion) deal.

Private equity groups have announced 12 bids for UK-listed companies this year, compared with one deal over the same period last year, according to Dealogic.

Supermarket deals

Supermarkets have benefited from a surge in demand during lockdown and are now poised to benefit from a strong economic recovery in Britain following the pandemic. Analysts say shoppers are likely to continue eating more meals at home even with restaurants reopening, particularly as many offices remain closed.

Morrisons has also managed to grow online sales strongly and the grocer supplies Amazo's Prime and Pantry customers in the United Kingdom with dry, fresh and frozen products.

The grocer is "seen as a bargain compared to overseas peers, with its deep integrated supply chain and the fact that it owns much of its store estate," according to Streeter. The company's store portfolio is worth close to £5.8 billion ($8 billion), according to financial statements.

Fortress made its offer along with Canadian pension fund CPP Investments and Koch Real Estate Investments, and it values Morrisons' shares at a 42% premium to their price before the company disclosed the offer from Clayton, Dubilier & Rice.

Morrisons chair Andrew Higginson said the company's directors believe the offer represents a "fair and recommendable price for shareholders" that recognizes its "future prospects."

Fortress said it does not anticipate engaging in any "material" sale and leaseback transactions — a quick way to extract cash from a business for expansion or further acquisitions but one that may ultimately hurt earnings if it saddles a company with high rental expenses.

The private equity group has also made other commitments to win approval for the deal from shareholders and workers, including safeguarding existing pension rights and supporting a recently agreed minimum wage of £10 ($13.86) an hour for all employees.

"It's clear to us that Fortress has a full understanding and appreciation of the fundamental character of Morrisons," Higginson said on Monday. "They are backing our strategy, our management and our people," he added.

UK labor union Unite, which represents Morrisons workers, has met the bid with suspicion.

In a statement calling for "urgent talks" with the supermarket, it said it won't cooperate with any sale unless "unbreakable guarantees" on jobs and working conditions are in place.

"We won't allow another takeover of a strong UK business see the workers trampled over as the boardroom and shareholders stampede towards their bonanzas," Unite official Adrian Jones said over the weekend.

Morrisons employs over 118,000 workers and is one of Britain's biggest food producers. "Morrisons is unique among UK supermarkets in that is owns its supply chain, from the farm to the warehouse," Jones added.

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