Up Morrisons offer to £6.5bn, firm told

BUSINESS:

The US private equity firm trying to buy Morrisons should increase its offer to around £6.5bn to merit engagement from the Bradford-based supermarket’s board, according to a top ten shareholder in the retailer.

Morrisons has rejected a proposed £5.52bn cash offer from Clayton, Dubilier & Rice (CD&R), around 230p a share.

THE US private equity firm trying to buy Morrisons should increase its offer to around £6.5bn to merit engagement from the Bradfordbased supermarket’s board, according to a top ten shareholder in the retailer.

Morrisons – Britain’s fourth largest grocer after Tesco, Sainsbury’s and Asda – has rejected a proposed £5.52bn cash offer from Clayton, Dubilier & Rice (CD&R), equivalent to 230p a share.

“In our view there is validity to a bid...,” said JO Hambro, which manages funds accounting for 3 per cent of Morrisons.

“We believe any offer for the group approaching 270p per share merits engagement and consideration.”

JO Hambro noted CD&R’s existing ownership of petrol forecourt group Motor Fuels Group (MFG).

It said if CD&R were to buy Morrisons, the combined group would have around 1,200 forecourt sites across the UK.

“The fuel purchasing and food retailing synergies here are clear to see. But CD&R should pay a fair price in order to access those synergies,” JO Hambro said.

It said a valuation of eight times earnings before interest, tax, depreciation and amortisation (EBITDA) “seems reasonable given the group’s qualities and the potential synergies on offer”.

Analysts expect CD&R to come back with a higher offer and believe other suitors could be flushed out, including possibly Amazon, which has a partnership deal with Morrisons.

A spokesperson for CD&R declined to comment.

Last week Legal & General Investment Management (LGIM), which Refinitiv data shows as having a 1.58 per cent stake in Morrisons, said it did not expect a bid at 230p to succeed.

Silchester, Morrisons’ biggest shareholder with a stake of 15.2 per cent has declined to comment.

Morrisons has flatly rejected the proposed offer, saying it “significantly undervalued Morrisons and its future prospects”.

City analysts believe CD&R is highly unlikely to make a hostile offer as it will need the highly respected team of Morrisons’ chief executive, David Potts, chairman, Andy Higginson, and chief operating officer, Trevor Strain, to stay on board.

All three have been credited with doing an excellent job at feeding the nation during the pandemic.

CD&R is seen as a big, established player in private equity and analysts said it was serious about its offer and has spent millions of pounds on it.

Morrisons owns a huge percentage of its store estate – about 85 per cent is freehold, which is way more than the average of 60 per cent among rivals. This means that a lot of Morrisons’ value is tied up in its estate.

Analysts said Morrisons wouldn’t want to see its estate sold off as one of the reasons why Morrisons is inherently strong is because it hasn’t sold its property.

The Morrisons family own around 5 per cent of the firm so they would not have enough clout to prevent a higher offer getting approval from shareholders. However, many institutions will want to see a 30 to 40 per cent premium on Morrisons’ current value. A 30 per cent premium would be a bid of £5.63bn and a 40 per cent premium would be a bid of £6.06bn.

Morrisons has declined to comment.