Legal & General warns over private equity interest in Morrisons

Comments seem critical of takeover practices commonly associated with sector


Britain’s largest asset manager has warned that Morrisons could be taken over by a private equity outfit for the “wrong reasons” after a third US buyout firm said it was considering a formal bid for the UK’s fourth-largest supermarket chain.

Legal & General Investment Management (LGIM) said that potential buyers should not buy Morrisons to take advantage of a possibly undervalued property portfolio, to load it up with debt, or to cut its tax bill, in comments that appeared to criticise practices commonly associated with the private equity industry.

Shares in Morrisons jumped 11.6% after the US private equity group Apollo said it was considering joining the battle to buy the UK supermarket chain, which operates 500 stores and employs about 118,000 staff in the UK.

On Saturday, the supermarket group announced it would recommend a bid from a consortium led by private equity firm Fortress, having rejected an approach last month from another buyout specialist, Clayton, Dubilier & Rice. Shares in Morrisons closed on Monday at 267.5p, above the level of the 254p a share bid from Fortress, as investors hoped for further bids.

Apollo’s announcement prompted hopes of a bidding war among some investors, but LGIM said it had concerns. It owns 2.8% of Morrisons, making it the eighth-largest investor, according to S&P Global Market Intelligence.

“As responsible stewards of our clients capital, it is important that the company isn’t taken over for the wrong reasons,” said Andrew Koch, a senior fund manager at LGIM, in a statement. “If an acquirer makes strong returns this should come from making the company a better business. It should not come from buying its property portfolio too cheaply, levering the company up with debt, and potentially reducing the tax paid to the exchequer.”

Morrisons share price chart

Apollo is the third potential suitor to declare an interest in Morrisons, announcing to the stock exchange on Monday that it was “in the preliminary stages of evaluating a possible offer”, in a move that could trump a £6.3bn bid by a consortium led by the US investment fund Fortress, the owner of Majestic Wine.

Investment managers, analysts and politicians have all expressed concerns that foreign investors are taking advantage of cheap borrowing and the relative undervaluation of UK companies because of Brexit uncertainty to pick off attractive British businesses at bargain prices.

The Labour party wants the government to step in to make sure a takeover does not threaten Britain’s food security, damage farming, or lead to job losses. However, a spokesman for Boris Johnson on Monday said it was a “commercial matter for individual businesses”.

The board of Morrisons confirmed on Saturday that it had accepted the Fortress offer, although the potential deal would still need to be put to shareholders, who could be swayed by more generous offers as the bidding war heats up.

The supermarket came into play last month after it rebuffed a £5.5bn offer from the buyout firm Clayton, Dubilier & Rice (CD&R) last month, saying it was “far too low”.

If approved, the bid led by Fortress will be the biggest private equity deal since the £11bn takeover of Boots in 2007. Fortress teamed up with the Canada Pension Plan Investment Board and the billionaire US oil industrialist Koch family to fund the bid, which values Morrisons at £9.5bn once debt is included.

LGIM’s Koch, who is not related to the US investors, said there were “more questions than answers” and called for Morrisons to release information about the current value of its properties, including its stores and warehouses. He added that the Fortress consortium had probably received more information because its deal was favoured by the Morrisons board.

The private equity bidding war as well as the prospect of remaining English pandemic restrictions being removed from 19 July helped the FTSE 250 index to a hit new record high on Monday.

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Apollo, whose portfolio includes security firm ADT and Chuck E Cheese, said it had not yet approached the Morrisons board about making a bid and it did not reveal the value of its potential offer. “A further announcement will be made as appropriate,” the New York-based group said.

The supermarket is believed to be drawing suitors partly because of its property footprint. Morrisons owns the freehold for 85% of its 497 stores, which offers financial security for a buyer, and prides itself on its 19 manufacturing sites including bakeries, abattoirs, fishing fleets and egg farms. The grocer has been a cornerstone of the UK’s food supply infrastructure during the pandemic and border disruptions due to Brexit.

Contributors

Jasper Jolly and Kalyeena Makortoff

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