Shares in Wm Morrison, Britain’s fourth-largest supermarket, surged by 30% on Monday following a takeover approach from US private-equity firm Clayton, Dubilier & Rice (CD&R), says Jonathan Eley in the Financial Times. CD&R’s 230p-a-share offer gives Wm Morrison an enterprise value of £8.7bn. It has rejected the approach, claiming it “significantly undervalued” its business and prospects.
The only surprise about CD&R’s approach “is that it has taken so long for a bidder to emerge”, say Andrea Felsted and Chris Hughes on Bloomberg. This is because pandemic shopping habits, combined with “lacklustre” share-price performances, have made grocers “alluring buys”.
What’s more, Wm Morrison has “all the ingredients” to be an “attractive” target, with “almost £5.8bn of freehold property” on its books, compared with the pre-bid market capitalisation of £4.3bn. And relations between management and the current shareholders are troubled, as the management has been criticised for receiving lavish pay despite “poor” stockmarket returns.
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Who will gatecrash the party?
It’s true that the bid comes at a moment of “heightened tension” between Wm Morrison’s board and its investors, says Simon Duke in The Times. Governance is regarded as a “festering sore” after two of its independent directors quit amid concerns over “perceived chumminess” in the firm’s top ranks, while a “multimillion-pound bonus” for CEO David Potts led to “one of the largest pay revolts on record”. Despite this bad blood, however, shareholders seem to be sticking by the current team. Legal & General, a top-ten shareholder, has come out in support of the decision to send CD&R “packing”.
Not so fast, says Ben Marlow in The Daily Telegraph. While the board technically rejected the offer, its response was relatively “meek”. Certainly there was nothing in it to suggest that “this is a company that is about to fight tooth and nail for its independence”. Instead, it implicitly left the door “wide open” for the private-equity firm to return with a higher offer and indeed “for others to gatecrash the party”. Alternative bidders could include other buyout firms, such as Lone Star and Apollo.
Morrisons’ board “has a point”, as CD&R can certainly afford to “dig a lot deeper”, says Aimee Donnellan on Breakingviews. Analysts expect Wm Morrison to boost sales by 3% a year over the next three years, as well as lift its EBITDA margin above 6%. This means CD&R could earn a “respectable” 17% internal rate of return on its investment without making many changes to the group’s business. Indeed, if it managed to boost Wm Morrison’s EBITDA margins to 7.5% – “the same as Tesco is expected to earn in 2024” – it could “afford to pay more than 300 pence per share and still book a 20% return”.
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