Morrisons shares surge on FTSE 100 following US takeover bid

  • UK stock market becomes increasingly volatile in the wake of US bid for Morrisons
  • Clayton Dubilier & Rice place a GBP 5.5BN offer for UK supermarket Morrisons
  • Morissons’ rejects the offer, stating it undervalues the firm and its prospects
  • Morrisons expected to receive offers from rival bidders

London’s blue-chip FTSE 100 has become increasingly volatile in the wake of news that UK supermarket chain Morrisons’ has rejected a GBP 5.5BN takeover bid from US private equity firm Clayton Dubilier & Rice (CD&R).

After plummeting to a low of 6,948.63 in early trading hours, the FTSE 100 has made a tentative recovery and is up by 1.47 points or 0.021% at 7,018.94 heading into New York trade hours.

The biggest fallers on the Index include Hikma Pharmaceuticals (LON: HIK), Admiral Group (LON: ADM) and SSE plc (LON: SSE), all of which are down by more than 1%.

Demand for the UK supermarket shares has prevented the FTSE 100 from slipping into the red territory at the time of writing, with Morrisons’ takeover bid appearing to boost hopes for a plethora of new US private equity acquisitions in Britain.

Among the biggest risers is Morrisons’ (LON: MRW), whose share price has surged by more than 50 points or 30% to 236.23.

Online grocery store Ocado (LON: OCDO) has also recorded substantial gains and is up 67.50 points or 3.59% at 1,948.50 at the time of writing, while Sainsbury’s (LON: SBRY) is up by more than 9 points or 3% at 269.90.

However, news of the move added more than GBP 1BN to the group’s market value, with supermarket rivals Sainsbury’s and Tesco also benefiting by 4% and 2%, respectively.

US private equity firm places takeover offer for Morrisons

CD&R make a GBP 5.5BN proposal for Morrisons

Morrisons’ share price jumped above the price proposed by the US private equity firm CD&R, which offered to purchase the UK supermarket company for GBP 5.5BN.

However, the Morrisons’ board rejected the offer, arguing that it significantly undermined the company’s value and prospects.

The Morrisons’ board has given the private equity firm until July 17th to revise the takeover offer or remove the bid.

Still, given that there has been speculation that other firms may put it in offers for the supermarket group, it’s unlikely that Clayton Dubilier & Rice will back down so easily.

The possibility of another UK supermarket firm being captured by a US equity firm comes after popular supermarket chain ASDA was swallowed up by a consortium led by the petrol station tycoons, the Issa brothers.

The billionaire brothers, who own the Euro Garages (EG) Group, bought ASDA for GBP 6.8BN, meaning the company returned to majority UK ownership for the first time in over twenty years.

Although Walmart retained a minority stake in the company, the Issa brothers hope to use the opportunity to support ASDA’s long-term growth and introduce a new “Asda On the Move”, with smaller convenience stores at three of its fuel station forecourts.

While this is good news for the UK, Britain’s Labour party is concerned about the potential private buyout of Morrisons – the UK’s fourth-largest supermarket chain – by US firms as previous deals of this nature have led to job cuts.

Concerns expressed over Morrisons’ becoming privately-owned

Morrisons’ employs approximately 110,000 people, and as of 2021, there were 497 stores in Britain, making it the fourth-largest food retailer in the UK, behind only Tesco, Sainsbury’s and ASDA.

In the financial year ending 2019/20, the UK supermarket made GBP 17,536 in annual revenue. Despite the coronavirus pandemic, the group’s annual revenue increased by 0.4% in the 2020/21 financial year to GBP 17.6BN.

The group also noted that they made a pre-tax profit of GBP 431M in the last financial year, a 5.6% increase on the previous fiscal period.

Morrisons’ Chair Andrew Higginson stated: “This has been a year where Morrisons’ resilience has been severely tested, and I could not be prouder of the way the whole business has met that test.”

However, the new bid has triggered concerns about the risks associated with the privatisation of large firms, such as employee retention, accountability and monopolies.

British Labour and Co-operative MP Seema Malhotra said that Morrisons’ privatisation could have a devastating impact on the business’s workforce and “leave many employees out of pockets.”

Ms Malhotra added: “If we look at the recent incident with Debenhams, thousands of employees lost their jobs and pensions due to crooked private equity firms loading the company with debt and walking away with the dividends. It has to end.”

The Union of Shop, Distributive and Allied Workers (USDAW) has refused to comment on what Clayton Dubilier & Rice takeover offer could mean for Morrisons’ workforce. Still, it will likely lead to job losses.

Executive editor of Retail Week also noted that CD&R’s takeover bid could “flush out more bidders” such as Apollo Global Management and Lone Star Funds, which had previously shown interest in purchasing ASDA.

There have also been talks of Amazon acquiring Morrisons’ due to the close relationship between the two companies.

Will CD&R’s takeover offer draw attention from rival firms?

The Financial Times reported that CD&R’s takeover offer for Morrisons’ could spark a bidding war with other private equity firms, including Amazon.

Morissons’ and Amazon’s relationship dates back to 2016 when the supermarket began to sell fresh produce and goods through Jeff Bezos’s website.

Morrisons has had a relationship with Amazon since 2016, under which the supermarket sells fresh produce and food through Amazon’s website.

Amazon took a significant stride into traditional retailing several years ago when the company obtained the US supermarket chain Whole Foods.

The online retail giant now has several Whole Food stores throughout the UK and given that there is a month until CD&R has to announce its intentions with Morrisons’, this could smoke out other interest in the retailer.

If CD&R put in a successful bid for Morrisons’, it would mark the second time in a year that the business has been involved in acquiring a UK supermarket, following their attempt to purchase ASDA from Walmart.

In addition to offering a cash amount, the private equity firm agreed to take on debt worth GBP 3.2BN, meaning the total deal is worth approximately GBP 9BN.

It’s also not the first time the private equity company has invested in UK retail, as a few years ago, CD&R sold its stake in variety-retailer B&M for GBP 1BN.

The firm also has strong ties to the former chief executive of Tesco, Sir Terry Leahy and David Potts, who currently sits on the board of directors at Morrisons.

Morrison’s chairman, Andrew Higginson, is also a former executive of Tesco, which could help the US firm over rival bidders.

As CD&R has close ties with Sir Terry Leahy, who, like the Issa brothers, is involved in the fuel industry, the firm could roll out the brand across more motor fuel group sites like Sainsbury’s, Tesco and ASDA.

The billionaire Issa brothers have made the rollout of ASDA convenience stores at its petrol stations a key objective in their long-term plans for the retailer, having obtained 323 convenience stores with petrol stations.

Following their bid, shares across several grocery retailers surged, with online retailer Ocado jumping up by as much as 5%, Sainsbury’s added nearly 4%, and Tesco rose by 1.1%.

Despite the implications that may occur, such as shareholder democracy, governance, and accountability, it’s extremely promising to see companies recognise the value of these firms from an investors point of view.

Pound Sterling (GBP) is also weak compared to its long-term history, so activity in this market could help add some value to the currency.

Morrisons’ has also been surprisingly resilient in the face of COVID-19 as other supermarkets have largely underperformed despite being allowed to remain open throughout the coronavirus pandemic.

CMC Chief Market Analyst Michael Hewson commented on the resilience of British supermarkets, noting that it was “surprising how well they have done under the circumstances.”

Mr Hewson added: “In the case of Morrisons profits halved last year, like-for-like sales growth remained resilient in its first quarter, rising 2.7%, despite the tough comparatives of last year, when sales surged for all three as people stockpiled all manner of staples.”

Although Morrison’s published a favourable report for the 2020/21 financial year, in the year to January-end, the supermarket reported a 50.7% drop in annual pre-tax profits due to returning more than GBP 200M in business rates relief to the UK government.

However, the firm faced backlash earlier this year for stripping back costs but failing to reduce bonuses for senior-level staff despite the challenges of COVID-19.

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