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Property, Cash and Amazon: Why Buying Firms Are Struggling to Buy UK Morrisons

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Property, Cash and Amazon: Why Buying Firms Are Struggling to Buy UK Morrisons

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LONDON – At least three private equity groups armed with foreign cash have lined up to fight for Morrisons, a British supermarket with a large portfolio of properties and a deal with Amazon that could help expand its lagging online offering.

Interest in the chain, which has recently increased its market share in Britain’s fierce grocery business, partly reflects private equity’s newfound passion for UK Plc, as the nation recovers faster than expected from Brexit. and the COVID-19 crisis.

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However, the No. 4 Grocer may offer more potential than some rivals. Along with a large portfolio of properties and strong cash generation, Morrisons provides Amazon Prime members with same-day food deliveries.

‘Morrisons on Amazon’ now accounts for more than 10% of sales at most Morrisons stores where it is offered. Tying is helping a chain that has lagged behind in the burgeoning online market. And that alliance adds to the attraction for a buyer.

New York-based Apollo said Monday it was weighing an offer for the chain, which began 122 years ago as a market stall in the northern English town of Bradford.

Their interest was announced after a group led by Fortress, owned by Japan’s SoftBank, agreed on the terms for a $ 8.7 billion offering. Last month, an unsolicited proposal from the US group Clayton, Dubilier & Rice (CD&R) was rejected.

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The Amazon deal dates back to 2016, when the world’s largest retailer partnered with Morrisons to establish a foothold in Britain, the world’s second-largest market for online food retailing.

Morrisons is unique among British supermarkets in producing half of the fresh food it sells, so it can supply wholesale supplies to Amazon, while also packing the orders that the American online giant delivers to its Amazon Prime customers. .

The deal has sparked speculation that Amazon could buy Morrisons to boost its own supply in Britain’s food business, a fiercely competitive sector worth 212 billion pounds ($ 294 billion) a year.

But an investor in British supermarkets, who asked not to be named, said Amazon would still have to defend such an acquisition. “If I were a shareholder in Amazon, I would like to know why it is preferable to some of the other things that they could spend their money on,” he said.

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Amazon, which declined to comment, previously said it was keeping its investment options in Britain under review. It already owns 12.6% of UK takeaway delivery company Deliveroo.

Morrison’s battle is part of a broader revaluation of British assets, weighed down for years by uncertainty about Britain’s exit from the European Union, but with the outlook now clearer after new trade deals began in January. .

The world’s leading private equity groups, abundant in cash after having largely been out of the pandemic when markets were volatile, now believe they can price assets, even with limited visibility of the recovery. And Britain, they think, looks cheap.

MORE M&A IN UK PLC

London-listed companies are undervalued compared to their US and European peers, with the FTSE 100 trading on average at 13 times the 12-month forward earnings of their companies, while the S & P500 trading at 21 times and the STOXX 600 to 17 times.

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Mergers and acquisitions hit a record in the seven months to July 5, with deals worth $ 181.7 billion targeting British companies, Refinitiv data showed. Deals led by private equity firms to turn British firms into private companies rose to a record high of $ 27.7 billion, after falling to a record low of $ 1.1 billion in the same period last year. amid the depths of the COVID crisis.

The Morrisons race began three months after private equity group TDR with investors Zuber and Mohsin Issa completed the purchase of Asda, the No. 3 supermarket company.

Asda’s new owners merged their service stations with their existing fuel business and sold distribution assets to real estate investors to help fund the deal.

Morrisons had a free cash flow of 238 million pounds in the financial year before the pandemic, which private equity tends to value more than public markets.

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In addition, the Morrisons acquirer, which owns 85% of its nearly 500 stores, could look to sell and lease properties to generate cash after a deal is finalized.

DOING A BETTER BUSINESS

But such a strategy may not be widely accepted.

“If an acquirer makes good returns, this should come from making the company a better business,” said Andrew Koch, senior fund manager, Legal & General Investment Management, Morrisons’ No. 8 shareholder according to refining data.

“It shouldn’t come from buying your portfolio of properties too cheaply, putting the company into debt and potentially reducing the tax paid to the Treasury,” he said, adding that Morrisons should declare the value of its stores and distribution centers.

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Britain’s opposition Labor Party and unions have already raised concerns about an impact on jobs and investment, although a spokesman for British Conservative Prime Minister Boris Johnson has said the takeover proposals were a commercial matter.

Fortress, whose offer has been recommended to shareholders by the Morrisons board, is committed to retaining the shopkeeper’s headquarters, management and strategy. He also said that no sale or leaseback transactions were planned for the material store.

Britain’s farmers union said it was encouraged.

Morrison’s 15th largest investor, formerly Standard Life Aberdeen, described Fortress’s offer of 254 pence a share as “good value.” But the supermarket No. Shareholder JO Hambro wants closer to 270p.

Investors could test their commitments to good governance if another suitor were to offer a higher price without compromising on jobs, debt levels, investments or property.

($ 1 = £ 0.7209) (Additional reporting by Carolyn Cohn, Pamela Barbaglia, and Simon Jessop; Edmund Blair edited)

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In-depth reports on the economics of innovation from The Logic, presented in association with the Financial Post.

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