The share price of Britain’s fourth-largest supermarket chain, Morrisons, rocketed this morning. At the time of writing it was up by more than 30%.
What’s going on?
It’s the latest big UK-listed company to be targeted by private equity. And it’s certainly not going to be the last.
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Morrisons might be cheap, but no one else recognised it until now
This weekend, supermarket chain Wm Morrison put out a note that it had received an “unsolicited highly conditional non-binding proposal” from US private equity group Clayton, Dubilier & Rice (CD&R).
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Morrison rejected the bid, saying that it “significantly undervalued Morrisons and its future prospects”. CD&R now has until 17 July to either make an offer formally or pull it.
The private equity group had offered 230p a share. Shares in Morrisons closed at 178p on Friday, so you can see why they’ve shot up today.
Despite the management’s opinion that the deal “significantly undervalues” Morrisons, the market hasn’t really agreed, certainly until today. The share price hasn’t seen these rarified heights since the middle of 2018.
Anyway, shares in Morrisons’ two bigger rivals, Tesco and Sainsbury’s are also up today (Asda – which is being sold to the Issa brothers by previous owner Walmart – is the other member of the “Big Three” UK supermarkets).
In terms of the Morrisons deal specifically, it appears that CD&R is being advised by former Tesco boss Sir Terry Leahy. Sir Terry, you may remember, is the man who grew Tesco to the point where every other headline was worrying about Tesco’s dominance in much the same way as we worry about Amazon today.
(Sir Terry then also managed to leave with near-perfect timing before Tesco ran into a whole lot of trouble with over-ambitious international expansion – getting out on time is a rare skill in a CEO.)
As ever, you can argue over the case for the deal. Some analysts seem sceptical, though Nick Bubb, a well known retail analyst, reckons the bidding will have to go to at least 250p before a deal can be done.
CD&R already has experience in this area, notes The Times. It bought discounter B&M in 2013, then floated it in 2014. It also owns a big petrol forecourt operator, Motor Fuel Group. Leahy advised them on both of those deals. Some note the similarity to the Issa brothers’ purchase of Asda – the pair also own a big petrol station chain.
But the specifics of the individual deal – while interesting – are not what concerns us here.
Get ready for a feeding frenzy
This is just part of a much bigger trend. Private equity has already scooped up several big names in the UK this year. But Morrisons catapults the trend into the public eye in a way that seems likely only to accelerate it.
It’s not a great thing that so many companies are leaving the public markets, as Merryn has discussed on several occasions in MoneyWeek magazine. It has implications for shareholder democracy, political participation, and corporate governance, among many other things. So in the long run, this isn’t a healthy trend.
However, purely from an investor’s point of view, it’s great. It’s exciting to see that someone recognises that there is value in these companies. The UK (particularly the FTSE 100) has been a somewhat stolid market in relative terms. The pound is also still relatively weak compared to its long-term history. That might remain the case, but it does give the market an added frisson of value for overseas buyers.
But the other thing to remember is that private equity is sitting on a lot of money at the moment. That money does have to be used; it can’t just sit there indefinitely. So they are motivated buyers. If they can’t find amazing deals, they just need to find the best deals they can.
The Times had an interesting article by Ben Martin on this about a month ago. In it, Simon Borrows of listed private equity giant 3i pointed out that one reason private equity is now looking at publicly listed companies – despite the added hassles of taking them private – is because valuations in the private markets are so over the top.
In other words, private equity buyers are looking to arbitrage a perceived valuation gap between the markets that they’ve been operating in and the public markets. So again, it’s all about relative valuations.
We’re also at the stage in the cycle where buyers are far from price-sensitive. So if a rival potential buyer sees someone sniffing around their area of interest, chances are, they’ll react. They’ll be worrying about what CD&R and Leahy see that they’ve missed.
So there’s a good chance we’ll see a feeding frenzy before all of this is over. We’re already seeing reports that Amazon and other private equity groups are interested now. And looking at the share price of Morrisons this morning, you can see that investors are betting that 230p is now a floor, not a ceiling.
So politically and socially you might have qualms about Britain’s biggest companies being taken off the market and into private hands. But as an investor, it’s a case of “if you can’t beat ‘em, join ‘em”.
We’ve been recommending for ages that you have exposure to the FTSE and UK value in general. We see no reason to change that view. And we’ll be writing a lot more about it (and how to play it) in MoneyWeek magazine in coming weeks. If you’re not already a subscriber, you can get your first 6 issues free here.
