The Daily Telegraph - Business
MPs ready to demand Morrisons guarantees if US firm makes move
The board has opened the door to further offers but the pandemic has demonstrated supermarkets are of strategic importance
MPS are preparing to intervene in a potential takeover of Morrisons as investors brace for a feeding frenzy after the supermarket rejected a £5.5bn offer from private equity.
The business, energy and industrial strategy committee is understood to be preparing to write to the competition watchdog to seek assurances following the takeover offer from Clayton Dubilier & Rice (CD&R). The Competition and Markets Authority would be expected to look into a takeover of such a large UK business.
It comes after a group of Labour MPs expressed concerns that a private equity takeover of Morrisons could put thousands of jobs at risk.
Shares in Morrisons soared by more than a third yesterday to 240p, valuing it at £5.7bn – £1.4bn higher than its market capitalisation at the close on Friday – in a sign that investors are confident a higher offer will be tabled by CD&R or another suitor. CD&R is being advised by former Tesco boss Sir Terry Leahy.
The board of Britain’s fourth-biggest supermarket spurned CD&R’s 230p a share offer last week saying that it “significantly undervalued” the company.
Legal & General, a top 10 Morrisons shareholder, blasted the offer warning that CD&R “would not be adding any genuine value” to the company with its purchase.
Andrew Koch, a fund manager at L&G, told the Financial Times: “The [retail] sector generally looks undervalued, and private equity look to be interested in Morrisons partly because it has a lot of freehold property, which they would ‘sale and leaseback’ to generate cash to pay back to themselves.
“That’s not adding any genuine value, and the company could do that themselves. So I would personally not expect a bid to succeed at that level.”
City analysts suggested that Morrisons’ board would be forced to consider bids for the business if it received offers of 250p or more.
The surprise move by CD&R appeared to boost investor interest in Britain’s grocers yesterday, with shares in Sainsbury’s growing almost 4pc and by as much as 4.9pc at Ocado.
Clive Black, an analyst at Shore Capital, and Morrisons’ house broker, said: “We have stated for some time that ongoing interest in the grocers should be expected if equity capital markets do not appropriately value a share in the eyes of other capital pools.” CD&R has until July 17 to make a firm offer for Morrisons.
Imagine what the late Sir Ken Morrison would have made of a US private equity approach for the supermarket chain his family founded more than 120 years ago. It seems safe to assume that the famously straight-talking Yorkshireman would have issued a firm rebuttal of the £5.5bn bid that New York-based financiers Clayton Dubilier and Rice tabled at the end of last week.
Sir Ken was fiercely protective of the company that his father William started in Bradford in 1899 as an egg-and-butter wholesaler. He would have been up in arms at the prospect of the family business being loaded up with debt at the hands of a firm fronted by former Tesco boss Sir Terry Leahy.
Remember this was a man who once described the strategy of his successor Dalton Phillips as “bull----” during an angry tongue-lashing at one annual meeting. He certainly wouldn’t have been happy with the board’s meek response, which has left the door wide open for the private equity firm to return with a higher offer, and indeed for others to gatecrash the party.
When a company responds to an unsolicited takeover bid by talking about how it “undervalues its future prospects”, that is almost always interpreted by the other side as an invitation to return with a better offer. There was certainly nothing to suggest that Morrisons is about to fight tooth and nail for its independence.
Make no mistake about it, with its share price surging above the 230p offer price to 240p yesterday, Britain’s fourth largest supermarket is now firmly in play. Other buy-out firms such as Lone Star and Apollo, who tried unsuccessfully to buy Asda, will now be circling.
But if the board seems willing to accept its fate, and with no Sir Ken to lead the charge, then the Government should at least be on red alert.
Private equity’s predilection for financing deals with large quantities of debt dictates that any time it takes control of a company, that takeover must be scrutinised for its impact on jobs, suppliers, the balance sheet, and employee pensions.
But the pandemic means that any buy-out of a major supermarket must now be considered in terms of the ramifications it has for the UK food supply as well. If that sounds far-fetched then consider whether Morrisons’ 118,000 employees would have been as well-placed to keep the shelves stocked during a national crisis if it had been in the hands of overseas private equity owners whose model is all about maximising profit.
It has nearly 500 predominantly freehold stores that could be sold to finance any bid, plus a substantial food manufacturing arm that includes 20 separate sites, bakeries, abattoirs and even fishing fleets. One quarter of what it sells comes from its own supply chain.
There’s an issue of transparency and accountability with companies owned by private foreign investors that would make it much harder for ministers to ensure the nation’s food supplies were protected.
There must be serious questions too, about the ability of any company of strategic importance to serve the country if it is weighed down with an expensive debt burden, its best assets have been auctioned off, and its owners are focused on returns at all costs.
As the supermarkets have been at pains to point out, they may have enjoyed a lockdown trading boom, but hundreds of millions in added costs have taken a chunk out of the bottom line. Would a private equity firm have stomached those in the same way that shareholders have?
These are questions that should be asked of Asda too, which is being taken over by tycoons Zuber and Mohsin Issa and private equity firm TDR. The £6.8bn deal is being financed by billions of new debt, along with the sale of hundreds of Asda petrol stations, and a string of giant warehouses.
The introduction of the National Security and Investment Act earlier this year was hailed as the biggest shake-up of the takeover regime for two decades, handing ministers new sweeping powers to step in.
Yet it seems unlikely that they would exercise them in this case. The new rules were aimed at deals that involved critical infrastructure such as nuclear power and satellites as well as cuttingedge technology and intellectual property.
In which case ministers must seek rock-solid commitments from any buyer that debt levels will be manageable, investment and jobs preserved and the supply chain protected.
The Government cannot risk a repeat of the Cadbury saga, when Kraft quickly reneged on a series of promises to preserve the company’s manufacturing and tax base.
‘One quarter of what Morrisons sells comes from its own supply chain’
Challenger banks’ challenge
Much hype surrounds the attempts of a generation of so-called “challenger banks” and fintech hopefuls to loosen the stranglehold of the big high street lenders.
Mobile-only upstart Revolut promised much. It has expanded at breakneck speed, launching in multiple overseas markets including China, the US, and India and now has 14.5m personal account customers.
Yet, it has never been further away from making a profit. Losses doubled to £201m last year despite a 34pc rise in turnover to £222m.
Meanwhile the Big Five continue to tighten their grip on the mortgage market, current accounts and personal loans. No wonder they seem untroubled by the competition.