Morrisons‘ publicly traded shares jumped over a third on Monday morning, after the UK’s fourth largest grocery store rejected a $7.6 billion acquisition bid from Clayton, Dubilier & Rice of the United States.
The huge leap in its value was sparked by reports that Morrisons had become a takeover target for CD&R over the weekend, potentially igniting a bidding battle for the supermarket.
Investors anticipated that other supermarket chains might become targets for private equity investors or that a bidding war could erupt as a result of the revelation, with online powerhouse Amazon – which has an online delivery contract with Morrisons – one prospective bidder for its partner. So far, this is only speculative, but investors can buy Amazon shares UK with the hope that the company could be set for an even bigger expansion.
Morrisons has been facing a dwindling market share, now down to 10% from 10.6% five years ago. American private equity companies Lone Star and Apollo Global Management have been cited as prospective buyers. The grocery industry in the United Kingdom appears to be ready for additional takeovers. Despite being successful and earning normal dividend yields of approximately 4%, the entire sector’s share price performance is viewed as under-performing when compared to U.S. grocers, for example.
Morrisons rebuffs takeover bid, but there could be more
Morrisons first revealed on Saturday that it had rejected a preliminary offer from Clayton, Dubilier & Rice, which was made on or around June 14th.
According to the Bradford-based company’s board, they had “unanimously concluded that the conditional proposal significantly undervalued Morrisons and its future prospects”.
On friday, Morrisons’ share price closed at 247c, before surging on Monday as trading resumed for the first time since the statement. CD&R had offered almost 320c per share in cash.
The private equity company has until July 17 to submit a formal offer and persuade a hesitant Morrisons management team to advise that shareholders approve the takeover.
Sir Terry Leahy, a former Tesco CEO, is a senior adviser for CD&R, and Morrisons’ shares, like those of its market-leading rival Tesco, have been trading below pre-pandemic levels as higher costs associated with operating during the pandemic have taken their toll despite recording booming sales at essential stores across the UK.
Morrisons now employs 121,000 people and earned $565.5 million in pre-pandemic earnings in 2019, which fell to $278.6 million in 2020. For 85 percent of its 497 shops, it holds the freehold. Its own supply network of fresh food producers, bakers, and farms accounts for one-quarter of what it offers.
CD&R has so far refused to say if it would return with a larger offer, but experts believe it is likely.
Previously, the former Walmart-owned Asda was purchased in a debt-based $9.4 billion deal by the U.K.’s forecourt billionaires Issa brothers and private equity company TDR Capital. Similarly, CD&R might follow Morrisons’ lead and unite its Motor Fuel Group of 900 gas stations with Morrisons, which has only a handful of convenience stores following a series of limited experiments with smaller store models.
There are also broader political fears that it will follow in the footsteps of the Issas by saddling Morrisons with debt and selling off its real estate holdings, and CD&R is said to be evaluating political response before deciding whether or not to submit a larger bid.