Private equity's supermarket sweep

“You wait ages for a bidder to emerge for one of the UK’s big supermarket chains, then three turn up at once”, says Dominic O’Connell on the BBC. Having recently turned down a takeover offer from US private-equity firm Clayton, Dubillier & Rice (CDR), Wm Morrison has just “wrong-footed” the market by announcing a deal with a group of investors led by Fortress Investment. At 254p a share it represents a 42% premium to the supermarket’s pre-bid share price. And a third private-equity group, Apollo, is “considering its own offer”.

The Fortress bid is certainly convenient for Wm Morrison’s board, say Nils Pratley in The Guardian. Not only did it get a better offer than CDR’s, but it also gives it the opportunity to claim the moral high ground by selling to an owner they claim has a “long-term approach to investing”. But Fortress is “not running a charity”, while its commitments to good behaviour, including “industry-beating pay rates for staff”, are “statements of intention” rather than legally binding “post-offer undertakings”. 

Don’t count on principle overriding profits, says Aimee Donnellan on Breakingviews. Whatever Wm Morrison’s board decides, there’s always the possibility that a new investor could go behind their backs by mounting a hostile takeover (bypassing the board and appealing directly to shareholders). Back-of-the-envelope calculations suggest that a bidder could offer 300p and still make a “decent return” if they were “prepared to ignore some of the employee-friendly promises made by Fortress”. At that price, institutional investors may swallow their complaints that private-equity firms “fundamentally undervalue British companies and have little regard for the long-term health of the businesses they buy”.

Whatever the outcome of the battle for Morrisons, the “supermarket sweep” is likely to continue, says Sam Chambers in The Sunday Times. Private-equity firms who lose out on this deal may target other supermarkets, attracted by their “stubbornly low share prices”, especially when set against “healthy cash generation and big property portfolios”. Technology companies, especially Amazon, could also join in the fun. In 2017 Amazon spent $13.7bn on US retailer Whole Foods and made an approach to Waitrose.

Which supermarket is next?

Of the remaining supermarkets, Sainsbury’s is most likely to be the next subject of a bidding war, says Laura Onita in The Daily Telegraph. Its assets are “underpriced and highly cash generative”, while it “still has a lot of fat to burn”, which gives any new investor plenty of room to increase profits further through cost-cutting. Billionaire investor Daniel Kretinsky, known as the “Czech Sphinx”, recently acquired a large shareholding in Sainsbury’s. While Kretinsky claims the deal is part of a strategy “to acquire minority stakes in companies that sell food”, the move has sparked speculation that it could be a prelude to a bid to take the grocer private.