Trustees of Morrisons’ pension schemes have broken cover to warn that a £7bn private equity takeover threatens to “materially weaken” their financial position, and demanded additional security over some of the supermarket’s assets.
Last week the Morrisons board agreed a debt-fuelled £7bn takeover by the US private equity group Clayton, Dubilier & Rice, in the latest round in a fierce fight for control of the country’s fourth largest supermarket chain. The 285p-per-share offer trumped that of a rival suitor, Fortress.
Unions and politicians are anxious about the wave of private equity takeovers gripping corporate Britain, fearing companies could be stripped of their property holdings and loaded up with debt, and that worker conditions and benefits could deteriorate.
Trustees who represent the schemes’ 85,500 members are concerned that they will be outranked by lenders who are helping fund the takeover should the supermarket hit trouble – meaning pensioners would have to wait for banks to be repaid first during a crisis.
They are also worried about the cost of servicing that debt burden , as well as future corporate activity including refinancing and restructuring.
The would-be new owners of Morrisons have made a number of commitments, including on pay, pensions and even, in CD&R’s case, the future of its valuable property holdings.
But Steve Southern, the chair of trustees for the Morrisons Retirement Saver Plan and the Safeway Pension Scheme, said more protection was needed and they wanted it to be in place before shareholders vote on the deal.
“An offer for Morrisons structured along the lines of the current offers would, if successful, materially weaken the existing sponsor covenant supporting the pension schemes, unless appropriate additional support for the schemes is provided,” Southern said. “We hope agreement can be reached as soon as possible on an additional security package that provides protection for members’ benefits.”
Unlike many company schemes, the two pension funds, which are closed to new members, are in surplus. They benefit from security over some of the company’s large freehold property estate.
However, they do not have enough money to buy annuities for their 85,500 members, with the cost of doing so estimated to be £800m on a windup basis, the trustees said. The current funding arrangements would allow them to complete this task within a decade.
While this “buy out” deficit remained, they said, the schemes were dependent on the Morrisons business for support, and if it were to go bust they would be an unsecured creditor.
Whether it was an offer from CD&R or Fortress that succeeded, without additional protection the change in ownership would weaken the company’s ability to support the schemes, the trustees said in a lengthy statement.
Pensions have become an increasingly sensitive area in takeovers, after high-profile scandals such as Sir Philip Green’s £1 sale of BHS which left a huge hole in the department store chain’s pension scheme. He later paid £363m to make it good.
The trustees had been in talks with Fortress since last month when the grocer’s board backed its offer for the company. However, the board has now switched to CD&R and as yet they have not had the same opportunity to hold discussions with the buyout firm, although an initial meeting has taken place.
In a statement CD&R said that if its takeover was successful the pension rights of all of Morrisons’ management team and employees would be “fully safeguarded”. It described it first meeting with the trustees as a “positive discussion” and said it accepted that they would want to discuss providing additional security to the schemes through an appropriate mitigation package.
“Given their position as important stakeholder in Morrisons, CD&R looks forward to further positive engagement with the trustees and to providing the appropriate support to the schemes and its members,” it said.
The trustees said they wanted to agree an appropriate mitigation package – which would be likely to focus on signing over the rights to more of the company’s property – with CD&R as soon as possible. They would also demand the same concessions from Fortress should it continue to pursue an offer for Morrisons.
John Ralfe, an independent pensions consultant who has previously advised Morrisons on its pension schemes, said the trustees were “doing the right thing in asking for cash or security to protect the position of members”, and suggested the figures involved would not be a dealbreaker.
“The schemes are in good shape, so the buy out deficit is only £800m, not large in the context of the CD&R offer,” he said. “CD&R should get out their chequebook and pay some or all of this.”
