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.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
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”.
-
First Solar is set to shine – should you invest?Solar-power specialist First Solar will benefit from Donald Trump’s policies, says Matthew Partridge
-
Private assets: profit from the potential in these fundsOpinion Charlotte Cuthbertson and Tom Treanor of the Migo Opportunities Trust highlight three funds where they'd put their money
-
Camellia: an unusual tea producer that rewards patient investorsCamellia is shedding its eclectically diverse portfolio of assets to concentrate on its strengths. For investors, it's a rare opportunity
-
How to approach active ETFsActive ETFs have several advantages over other forms of open-ended investment vehicles, says David Prosser
-
Global equities that should prove resilient to the stock market’s stormsOpinion Alex Illingworth of Goshawk Asset Management highlights three diverse opportunities in global equities despite a turbulent landscape
-
US stocks are more expensive than ever after Trump's tariffsWe don’t need to second-guess the effect of Trump's tariffs to think that the rest of the world offers better value
-
How to use SAYE and SIP schemes to multiply your moneyEmployers’ savings or share-incentive plans like SAYE and SIP schemes can help top up your pension
-
Sizzling sales at Sysco – should you invest in this US food supplier?The American food distribution group Sysco is expanding rapidly worldwide and is still reasonably valued
-
Where investors can find value nowOpinion Active fund managers and blue chips on both sides of the Atlantic look appealing, says ByteTree’s Charlie Morris
-
UK equities: where to find a great British bargainUK equities are staging a comeback, but there’s still plenty of value out there, says Rupert Hargreaves
