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Price and politics set the stage for Morrison’s three-way bidding war

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Price and politics set the stage for Morrison’s three-way bidding war

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(Bloomberg) – A trio of the world’s largest private equity investors are vying for a once-unloved Bradford grocer in northern England, setting the stage for a second three-way takeover fight. in the UK supermarket sector in less than a year.

Ultimately, the battle for Wm Morrison Supermarkets Plc could be won on three fronts: price, ownership, and politics.

Here’s how the contenders compare:

Fortress Investment Group

So far, Fortress Investment Group is in the first position. A consortium led by a subsidiary SoftBank Group Corp. has won over the bosses of the nation’s fourth-largest supermarket with an offer of 6.3 billion pounds ($ 8.7 billion) and promises of payment, pensions and vendors.

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He also acted swiftly to assure the UK government of his credentials as a “responsible owner”, highlighting the potential role politicians could play in sanctioning a deal amid concerns over worker protection and the food supply.

“We are well aware of the broader responsibilities that owning a company brings to the history, culture and importance of Morrisons to the British public,” Fortress Managing Partner Joshua Pack wrote to the UK Business Secretary. , Kwasi Kwarteng, in a letter seen by Bloomberg News.

In his letter, Fortress made certain guarantees not to sell the Morrison family silver: nearly 500 stores, as well as manufacturing sites, about 85% of which they own. This could be key to winning over investors and politicians.

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Legal & General Investment Management, one of Morrison’s top 10 shareholders, on Monday requested more information about the value of real estate so investors can decide whether bidders are looking to buy the company cheaply. The property portfolio was last valued at around £ 6bn.

Other members of the Fortress consortium include the Canada Pension Plan Investment Board and the real estate arm of Koch Industries Inc., the largest privately held company in the US, run by the Koch family of prominent conservative political donors.

Clayton dubilier and rice

Fortress’s proposal beat a previous £ 5.5 billion offer from US private equity house Clayton Dubilier & Rice, rejected by Morrison as too low. CD&R was in the midst of talks with financial banks as it pondered a higher bid when the Fortress announcement caught it off guard, according to people familiar with the matter.

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He continues to consider his next steps and there is a feeling from the private equity investor that while Fortress currently has the backing of Morrison’s board, a higher offer could ultimately win the day, said the people, who asked not to be named. when discussing confidential information. .

An indication has already been received from another major Morrison investor, JO Hambro Capital Management Ltd., that a new proposal in the 270 pence per share range would be worth seriously considering; Fortress has offered 252 pence in cash and a special dividend of 2 pence per share.

CD&R is no stranger to UK retail and works closely with Senior Advisor Terry Leahy, former CEO of Tesco Plc. Most of Morrison’s top management team consists of former Tesco employees who worked with Leahy when it was aggressively expanding into Asia and US analysts have said that it is unlikely that CD&R, armed with this intimate knowledge of the sector, will not go back to the fold.

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A representative for CD&R declined to comment.

Apollo Global Management

Fortress could face increased competition from Apollo Global Management Inc., which informed the market Monday that it had also been looking at Morrison. The firm said it has not made any approaches and is in the preliminary stages of considering one.

The New York-based alternatives investor has already done some recent homework in the sector, having been one of the bidders for Asda Group Ltd., Britain’s third-largest grocery producer, in 2020. Asda, which also attracted the interest of the Lone Star Funds, was finally taken over by TDR Capital and the Issa brothers in a 6.5 billion pound deal.

A possible setback for Apollo this time around could be Fabrice Nottin’s absence. He was a partner who helped lead Apollo’s discussions of a possible deal with Asda, only to leave soon after, according to people familiar with the matter.

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A representative for Apollo did not immediately provide comment.

Silent suitors

UK supermarkets are truly in the crosshairs of private equity, with companies attracted to the sector by cheap public valuations, sizeable property portfolios and large and reliable cash flows. More recently, supermarkets have seen an increase in sales in stores and online as the pandemic changes consumer spending habits, possibly forever.

As a result, the market is not ruling out more companies bidding for Morrison.

“With Fortress offering 254 pence a share and no sale or leaseback, others could be piling up numbers to come back with a higher price that will include property sales,” said Tony Shiret, retail analyst at Panmure Gordon & Co., in a telephone interview.

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“Private equity offerings are weird beasts, as they often don’t have to start paying commitment fees on financing until there is a firm offer, so there is plenty of time to play long before everything is finalized.” He said.

There are also doubts about the intentions of Amazon.com Inc., which surprised the global grocery sector in 2017 when it bought Whole Foods Market Inc.Amazon and Morrison already have a close relationship: Morrison supplies the US giant’s cashierless grocery stores. in the UK and sells food to its Prime members. Controlling the supermarket would give Amazon a nationwide network of stores and food production capabilities, eventually allowing it to break out of the grocery business in Britain.

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This year, Amazon opened its first “go out only” store in West London, where shoppers can pick up their wares and leave without having to use a payment point. Many of the store’s items are supplied by Morrison, which unlike its rivals has a large wholesale manufacturing arm and produces much of the food it sells.

Reaction so far

In the past, private equity has earned a bad reputation in the UK for hoarding cash by selling valuable assets and leaving companies burdened with ever-increasing rental bills. But the political reaction to a possible purchase of one of Britain’s four key stores has so far been muted.

Kwarteng is engaged and monitoring the situation, according to his office, while Prime Minister Boris Johnson has been clear in stating that any change of control at Morrison is a “business matter.”

The opposition Labor Party has demanded a careful examination of the possible acquisition of foreign private capital from a 122-year-old chain highly concentrated in the north of England. Morrison’s main union, Unite, has demanded guarantees on jobs and working conditions on any acquisitions. Morrison has about 113,000 employees.

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