Bidders’ enthusiasm for Morrisons unlikely to be dampened by results

US rivals remain keen, but with profits under pressure, some wonder if the supermarket is really worth a £7bn offer

Morrisons’ rollercoaster ride continues this week as the Bradford-based supermarket updates the market, and its suitors, on how business is doing.

A bid battle for the Yorkshire grocer between two US-based private equity firms has put rockets under Morrisons’ share price, catapulting it into the FTSE 100 as part of the reshuffle this week for a last blast in the spotlight before it is – probably –bought and delisted.

On 5 October, shareholders will vote on a £7bn offer from US group Clayton, Dubilier & Rice, which counts former Tesco boss Sir Terry Leahy among its senior advisers. Further details of that offer are expected to be published next week after Morrisons’ half-year results on Thursday.

However, a rival consortium led by US group Fortress could still come back to top CD&R’s bid for the 497-store group, which employs 118,000 people. Investors clearly believe this is possible: Morrisons’ shares are trading at 290p, slightly ahead of the 285p on the table from CD&R and more than 60% up since bid rumours first emerged.

Fortress has not dampened those hopes. It said in bold type in a statement that followed CD&R’s offer announcement that it “urges Morrisons shareholders to take no action”, presumably as it is serious about beating the £7bn bid.

Fortress is reportedly still in talks with fellow finance group Apollo, and is already working with the billionaire Koch family and with GIC, Singapore’s sovereign wealth fund, so is certainly not short of firepower. But is Morrisons really worth more than £7bn?

After last spring’s bumper performance, as families stocked up to sit out the pandemic, market share data now indicates that Morrisons’ sales are down more than 8% year on year. However, the chain was ahead of Asda and Sainsbury’s in terms of growth on 2019 sales – up nearly 9%.

Profits are also likely to remain under pressure. With shoppers now feeling freer about heading into stores, discounters Aldi and Lidl are hoovering up sales again, while the convenience stores Morrisons has looked to for future growth via wholesale have come under pressure.

That competition should help to keep a lid on price rises despite cost inflation, driven partly by the impact of Brexit on staff availability and import processes. The so-called pingdemic, which kept even double-vaccinated workers at home if they had come into contact with a Covid-19 case, may also have inflated costs over the summer.

Susannah Streeter, investment and markets analyst at Hargreaves Lansdown, says Morrisons nevertheless remains attractive for private equity thanks to its large property portfolio and a variety of options for future growth, including online. CD&R, for example, is thought to be keen to put Morrisons outlets into its MFG petrol forecourts business.

The real plum in Morrisons’ Yorkshire pie, though, is the group’s substantial property portfolio, which includes 85% of its supermarkets.

Bidders may promise the UK government and other stakeholders that they will not sell off the £6bn of rock-solid assets, but analysts believe that more than £2bn will be needed to finance any deal. The higher the price goes, the more pressure there will be to sell off property.

Contributor

Sarah Butler

The GuardianTramp

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