Everyone loves a bargain, particularly private equity firms. But disappointment may yet await Clayton Dubilier & Rice (CD&R), the group which this week launched a £5.5billion 230p-a-share bid for Morrisons, the UK’s fourth largest supermarket.
Not only has the approach fuelled the controversy over private equity takeovers of British businesses – a scandal exposed in a campaign by this newspaper – it has also caused a reappraisal of the value of Morrisons, Marks & Spencer, Sainsbury’s and Tesco.
In past months, their share prices have not reflected their pandemic reinvention: the rapid expansion of their online arms was commendably rapid. But this week, their shares have jumped.
At last, if you are an investor – either directly or through such funds as Threadneedle UK Equity Income or UK Equity Opportunities, or Schroder Global Equity Income – you can dare to hope that your forbearance may be rewarded.
Until this week, supermarket shares had been among the most shorted stocks.
The reassessment may not end, even if the Competition and Markets Authority becomes involved in the bid.
Chris Beckett of Quilter Cheviot says: ‘Supermarkets may be seen as low margin, low growth businesses, but the bid for Morrisons has reminded people of the supermarkets’ other positive attributes, like their good cash flow.’
So lacklustre has been the sector’s share performance that Clive Black of Shore Capitol told Investment Extra last December that these companies could be bid targets in 2021.
In February Asda was bought out by EG Group and TDR, a private equity firm. Now the approach for Morrisons appears to have put the whole sector in play. The view is that CD&R must pay more, or be outbid by Apollo or another private equity group, or by Amazon, which has a tie-up with Morrisons.
As a private investor, you should now be watching how the institutional shareholders react.
Silchester, an asset management group and the largest Morrisons shareholder with a 15 per cent stake, is not saying anything publicly.
Legal & General, another major investor, contends that the CD&R offer ‘significantly undervalues the company’.
Beckett says there is speculation that these investors may be looking for a price ‘north of 250p’. Note, however, that some analysts argue that Morrisons is worth 295p a share, based on its property portfolio.
The company – the UK’s second largest food producer – owns its 19 manufacturing sites, plus 85 per cent of its 497 stores.
If CD&R succeeds, Morrisons chairman Andy Higginson and chief executive David Potts would be reunited with their old Tesco boss Sir Terry Leahy who is a CD&R partner.
While Morrisons executives and its big investors deliberate and negotiate ahead of the July 17 deadline, when CD&R must make its intentions clear, you have time to decide on your stance.
Many will be opposed to a private equity takeover of Morrisons which threatens jobs, Britain’s food supply and higher prices for shoppers.
Nevertheless, the spotlight that has now been turned onto the supermarket sector means that existing shareholders should sit tight.
Those who have previously seen these shares as boring could now consider a flutter because of the changes set to reverberate through the grocery trade – from Amazon and the new rapid-delivery companies like Getir.
Analyst Natalie Berg says: ‘Amazon has deep pockets and a hunger to disrupt bricks and mortar. The company knows that it will never have a meaningful impact on the UK grocery industry without a major acquisition.’
Morrisons seems not to be an object of desire for Ocado whose shares jumped this week thanks to its joint venture with M&S.
But the payback from a bet on Ocado also hangs on the success of the roll-out of the technology that it sells to other supermarkets in North America. There is a question mark as to whether this technology, developed for Britain’s suburban streets, will work as well in the downtown areas of US cities, or in sparsely populated states.
The Morrisons bid should provide some overdue excitement for shareholders in the short-term.
But in the longer term, the outlook for these stocks will increasingly depend on the higher expectations of British consumers.
People now want same-day delivery. Some want delivery within the hour.
The business that can achieve such service and make a profit could be the next grocery stars, despite the Deliveroo IPO debacle.
Morrisons, a business that began in Bradford in 1899, has a £5.6billion market capitalisation.
This is about the same as the £5.4billion price tag put on Getir.
This Turkish-owned rapid-delivery app, founded in 2014, is set to launch in London and other cities this year and may soon float on the stock market.
Getir says it wants ‘to democratise the right to laziness’, an objective that venture capitalists are eager to back, pouring money into this instant delivery service and into its European rivals like Flink and Gorillas.
Although CD&R may be a pandemic predator, it has shown us that the food retailing sector is anything but boring.