Does it matter that the directors of Wm Morrison could soon sell Britain’s fourth-largest supermarket chain to a private equity buyer?
Aldi and Lidl are owned privately by two separate, but equally secretive, German billionaires. And Asda has long been owned by the US retailing conglomerate Walmart, which provides only a partial financial picture of its Leeds-based supermarket offshoot.
It may not be long before Asda’s finances and corporate governance are even more obscure, now that a £6.8bn private equity buyout, in tandem with the Issa brothers, has cleared the regulatory hurdle of a competition watchdog inquiry.
The proposed buyout of Morrisons by US private equity firm Clayton, Dubilier & Rice, which comes hot on the heels of the Asda regulatory ruling, would mean that a significant number of the UK’s big supermarket chains – collectively employing large numbers of people – operate behind a curtain, where only small shafts of light reveal their inner workings.
Among major retailers, Sainsbury’s and Tesco will be the only publicly listed – and therefore relatively transparent – companies, although the member-owned Co-op and employee-owned Waitrose give a similar level of insight into their operations.
However, that may not be the case in a few years’ time. As one retail analyst told the Guardian last week: “The whole industry is now in play. It’s not unrealistic to say that there could not be a single quoted British supermarket left in the foreseeable future.”
A lack of transparency is one reason to decry private equity’s increasing dominance of many commercial and industrial sectors. The profit motive above all else is another. It encourages asset stripping, a tendency to give lip service to tackling the climate emergency, and executive pay scales that are off the chart.
The bid for Morrisons highlights these concerns. It owns farms and food factories rather than buying from third-party suppliers. In recent years it has bought fish factories in Cornwall and even found itself owning fishing boats as part of the deal.
It has longstanding arrangements with 2,700 British farmers, who deliver livestock and produce directly to its 17 processing facilities, which supply 493 stores. The company, which employs about 121,000 people, claims to be the largest single customer of the UK farming industry.
On top of that, it owns an estimated 85% of its stores and there is a healthy surplus in its defined benefit pension schemes.
All this was significantly undervalued by the London stock market, but seen as rich pickings by private equity, especially when the company, like so many others, was hit by a drop in profits during 2020. The board has rejected a £5.5bn offer, but expects an upgrade soon.
Private equity firms normally take pension fund or sovereign wealth fund money and buy failing businesses with a view to turning them around and selling them for a profit after three to five years.
At Morrisons, that is likely to mean offloading the stores and leasing them back, releasing billions of pounds at a stroke. Then the business could be loaded up with debt, generating a huge interest bill and making it vulnerable to future increases in interest rates. Pension fund contributions and the supermarket chain’s relatively union-friendly, family atmosphere could be next on the block.
There have been signs that the Conservatives recognise that private companies, and private equity, not only escape scrutiny, but often play by a different rulebook. As prime minister Theresa May said in 2016 a heavy regulatory load on listed companies was another encouragement for them to go private. Her government was therefore thinking about what regulations should apply across the board.
Unfortunately, there is little sign that the current government is concerned about cash-rich private equity firms buying up the UK’s temporarily undervalued companies.
But it should be. As a starting point, it should develop laws that create a level playing field, and one that levels up to the standards currently imposed on listed firms.
Consumer champion finally grows some teeth
Are consumers finally getting the champion they deserve? The Competition and Markets Authority is certainly picking bigger targets these days and last week opened a probe into Amazon and Google over concerns that they have not done enough to tackle the widespread problem of fake reviews on their websites.
The investigation comes hot on the heels of the watchdog’s good work on behalf of leaseholders. Some homeowners are now to be refunded unfair ground rents and allowed to buy the freehold of their property at discount, after the CMA found they had been overcharged and misled by developers.
Chief executive Andrea Coscelli says he is worried “millions of online shoppers” could be misled by fake reviews and spend their money based on those recommendations”.
This is not a new area for the CMA. It had stern words with Facebook and eBay in 2019 after finding on their sites a thriving marketplace for misleading online reviews. The surprising thing, perhaps, is that it has taken it two years to grow suspicious of all the five-star reviews to be found on Amazon, which was surely the elephant in the room all along?
Andrew Tyrie, the former MP and Treasury select committee chair, who quit as CMA chairman last year and has still to be replaced, recently called, in the Financial Times, for the creation of a “more assertive, powerful and accountable regulator”.
The CMA should, he suggested, put more effort into finding out what is going on in markets where consumers are being harmed, and spend more time talking to small businesses and the public. “The CMA needs to put the consumer first,” he added “And it needs to get on with it.”
If we are still getting to grips with fake online reviews, it would seem hard to disagree.
Chevron may regret being the last oil dinosaur
The seismic shock that ripped through the oil industry last month has failed to move at least one of the world’s biggest fossil fuel companies.
US oil giant Chevron last month suffered a humiliating shareholder rebellion after 61% of its investors voted in favour of an activist resolution calling for the company to do more to reduce its carbon emissions.
On the same day, shareholders in ExxonMobil defied the company’s board by backing an activist fund intent on forcing it to set a climate strategy, and a court in the Hague ordered Royal Dutch Shell to reduce its emissions too.
The writing may be on the wall for the oil industry’s climate laggards, but Chevron doesn’t seem inclined to read it. Its chief financial officer, Pierre Breber, publicly insisted last week that he had no plans to follow the lead of European rivals by shrinking his oil and gas business. Instead, he told an industry conference, Chevron would work on shrinking its own operational emissions and spend a paltry amount on producing renewable energy.
In response, Follow This, the activist investor behind the Chevron rebellion as well as others, has warned that Breber’s three-decade career in fossil fuels might have left the finance boss unable to imagine any business model beyond turning hydrocarbons into petrodollars.
It would take more than a failure of imagination for Chevron’s leadership to wilfully ignore its own shareholders, and turn a blind eye to the far more ambitious steps outlined by rival oil companies on the other side of the Atlantic.
BP expects its own oil and gas business to shrink by 40% by the end of the decade, and even Shell – which has come under criticism for its plans to expand its gas business – plans to let its oil production dwindle by about 1% a year in the coming decades.
The response by Chevron is undoubtedly shameless, but ignoring the warnings of its own investors may prove to be senseless, too.
