Morrisons shares rise after fresh takeover bid from CD&R

Battle for Britain supermarket chain heats up with rumours Amazon may also enter the fray

A view of a Morrisons supermarket in Birtley, UK. Morrisons has attracted interest from US private equity firms because of its large real estate portfolio. Reuters

Shares in British supermarket Morrisons rose in early trading on Friday as investors welcomed news of the £7 billion ($9.53bn) buyout bid from US private equity firm Clayton Dubilier & Rice (CD&R) as the battle to take over the brand heats up.

The grocery chain’s stock was up as much as 4.5 per cent in early trading, after the Morrisons board said late on Thursday it would unanimously recommend CD&R’s £2.85 a share bid worth £7bn and drop the £6.7bn offer from Softbank-owned Fortress Investment Group, which it accepted earlier this month.

However, analysts said Morrisons' rising share price indicates Fortress might come back with a counter offer.

“Supermarkets were one of retail’s big lockdown winners and the allure of those retail juggernauts has been clearly visible over the past weeks as the battle to takeover Morrisons has pulled no punches,” said Danni Hewson, financial analyst at AJ Bell.

“In the dying minutes of what could be the final round, first bidder CDR got it’s second wind and delivered a £7bn knockdown offer. Will Fortress pick itself of the mat and find another level? It is a real possibility.”

The battle to buy Morrisons, Britain’s fourth largest grocer after Tescos, Sainsbury’s and Asda, highlights the private equity appetite for British supermarkets after the UK grocery sector saw their fortunes change dramatically during the pandemic when a series of lockdowns triggered a surge in food spending.

Asda was snapped up in a £6.8bn buy-out by the Issa brothers and London private equity firm TDR Capital last year, who took on £3.5bn of debt to fund the acquisition from Walmart. Interest has also zoned in on Sainsbury’s in response to the company's bullish growth.

Meanwhile, Morrisons has attracted interest because of its large real estate portfolio, with the company owning about 90 per cent of its almost 500 stores.

The business, whose turnaround has been led by chief executive Dave Potts, generates large amounts of cash and has low underlying debt and a pension surplus.

The latest offer from CD&R is the second from the company, which had its previous bid of £2.30 a share, worth £5.52bn, rejected.

“CD&R is widely recognised for being a trusted partner to the management teams of the businesses in which it invests and for providing ongoing support to help them innovate, develop, and grow their operations,” Morrisons said.

Fortress has also submitted two offers, with expectations it will make a third, while rumours are also swirling that tech giant Amazon could also enter the fray.

“Morrisons is unique, its production capabilities make it extremely attractive at a time supply is becoming a huge issue and the Japanese bank behind Fortress has deep pockets,” said Ms Hewson.

“Then there’s the Amazon factor. No one really expects they’ll table a bid, but even their position on the field is huge factor.”

A customer shops at Morrison's supermarket in London. Some politicians have raised concerns that a private equity buyout could cut jobs and sell off large chunks of the grocer's real estate portfolio. EPA

Morrisons shareholders will vote on CD&R's offer at meetings expected in the first half of October.

Under British takeover rules, Fortress could still return with a higher offer before those meetings, with the company saying on Thursday it was "considering its options".

If Fortress did make another offer, the Takeover Panel, which governs merger and acquisition activity in the UK, could instigate an auction process.

However, Ms Hewson said CD&R Rice appear a “more natural fit for the Yorkshire business” while shareholder sentiment will be boosted by the presence of “retail royalty” and former Tesco boss Sir Terry Leahy, who is a senior advisor on this deal.

“But ultimately this is a numbers game and in business sentiment often only goes so far,” Ms Hewson said.

Some politicians have raised concerns that a private equity buyout could cut jobs and sell off large chunks of the grocer's real estate portfolio.

However, CD&R has committed to retain Morrisons' existing management team and execute its strategy. It said material store sale and leaseback transactions were not planned.

CD&R's current investments include Motor Fuel Group, which operates 918 fuel forecourts in the UK. Morrisons owns 339 fuel forecourts.

“CD&R’s forecourt operation might require a few tweaks to please the UK’s competition watchdog,” said Ms Hewson, “but adding Morrisons’ to the portfolio will put them in a strong position to be at the forefront of the switch to electric.”