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Supermarket chain Morrisons (MRW.L) turned down a £5.5bn ($7.65bn) preliminary takeover bid from US private equity firm Clayton Dubilier and Rice (CD&R) on Monday.
The company, which is the fourth largest supermarket chain in the UK, said the offer of 230p a share, a 29% premium to Friday’s closing price, “significantly undervalued the firm.”
This was despite the move taking on £3.2bn pounds of Morrisons’ debt, taking the total value of any deal to almost £9bn.
The bid marked the second time this year that a private equity firm has been involved in the takeover of a UK supermarket, after TDR Capital and billionaire Issa brothers bought a majority stake in Asda from US parent Walmart (WMT). Czech billionaire Daniel Kretinsky also increased his stake in Sainsbury’s to 10% in April.
There is now increasing speculation that the move will prompt other bidders to make an offer for the group.
Here are some reasons of why Morrisons has become a takeover target:
Private equity firms have snapped up more British firms in the last 18 months than at any time since the financial crisis, according to data from Dealogic. Figures showed deals totalling more than £50bn during the period.
Neil Wilson, chief market analyst at Markets.com, said: "There is a lot of private equity money sniffing around the UK as valuations are low - we knew this before the pandemic.”
On Monday, Morrisons stock surged more than 30% on the back of the weekend takeover offer as speculation circled that CD&R would push ahead with another offer, or other firms would swoop in.
American private equity firms Lone Star and Apollo Global Management are thought to be potential bidders, who both also expressed interest in buying Asda.
“The whole industry is in play now. It’s not unrealistic to say that there could not be a single quoted British supermarket left in the foreseeable future,” an analyst said.
New York-headquartered CD&R, which has made investments in Britain previously, has until 17 July to announce a firm intention to bid or walk away under UK takeover rules.
Morrisons has been battling with a falling market share in recent years, which is now down to 10% from 10.6% five years ago.
For the year to the end of January, the company posted a 50.7% fall in pre-tax profit to £201.1m. However, the chain, which currently has around 500 supermarkets in the UK and around 118,000 members of staff, saw digital sales increase 113% in its last quarter.
One of the reasons it is being eyed up for a takeover is due to the fact that its online business is still smaller than its rivals – leaving room for stellar growth.
Watch: Morrisons shares surge 30% after it spurns £5.5bn takeover offer
“Historically the UK supermarket sector has been viewed as a slow growth, highly competitive market. As such, it wasn’t seen as a natural source of takeover activity,” AJ Bell investment director Russ Mould said.
“Mergers were more plausible, such as we saw with Sainsbury’s trying to marry Asda to gain scale and find a new source of earnings growth. But non-trade buyers swooping for deals didn’t seem like an obvious play until we saw the Issa brothers snap up Asda after the Sainsbury’s deal collapsed.
“Morrisons’ balance sheet has plenty of asset backing and the valuation was relatively depressed before news of private equity interest.”
CD&R, which has previously banked £1bn from selling its stake in discount chain B&M, counts Sir Terry Leahy, the former chief executive of Tesco, as a senior adviser.
Through CD&R, Sir Terry is also chairman of Motor Fuel Group which operates hundreds of petrol forecourts and convenience stores.
A deal with CD&R means that Morrisons’ brand could be rolled out across Motor Fuel Group's sites.
Similarly, the Blackburn-based Issa brothers, are also the co-chief executives of petrol station operator EG Group; through their deal with Asda they bought more than 300 convenience and petrol forecourts.
Partnership with Amazon
Morrisons is a key supplier and partner of online retail giant Amazon, and has been since 2016. It also supplies McColls convenience stores.
Amazon has long been touted as a potential buyer of the supermarket chain as the grocer already currently sells ranges via Amazon Prime and Amazon’s bricks and mortar store in London.
George McDonald, executive editor of the publication Retail Week, told the BBC on Monday: "Amazon hasn't, so far, really become a force to be reckoned with in food but it would like to be. You wonder whether this situation might flush out interest from them."
Amazon currently owns US supermarket chain Whole Foods, which has seven outlets in London.
Neil Wilson, chief market analyst at Markets.com, said: “If Amazon were interested, you'd assume that an offer would have come by now. A PE [private equity] bid seems more likely and ultimately may be the best way to unlock value for shareholders who've gone through a lot but ultimately not seen any appreciation in years (before today).”
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