Will Morrisons benefit from a Fortress buyout?
Morrisons is on the verge of going private for the first time in over 50 years.
Earlier this month, the Big 4 grocer accepted a £ 6.3 billion takeover bid from private equity firm Fortress. It came shortly after a £ 5.5bn takeover bid by US private equity firm Clayton Dubilier & Rice (CD&R) – which Morrisons rejected.
Fortress’s new offering is expected to allow shareholders to receive 252p per share plus a special dividend of 2p. And while the buyout deal values Morrisons at £ 6.3bn, after including £ 3.2bn in net debt, that total value rises to £ 9.5bn.
However, it is not yet clear whether the bidding process is complete, with speculation that CD&R could come back with another offering, or a new offering – or offers – could come from another company. of private equity. Same giant online Amazon has been linked by making a potential offer.
Nonetheless, shortly after Morrisons rejected CD & R’s initial takeover bid, the grocer saw its share price rise 34%, its highest level since 2018. The news also had an effect. training and supported the actions of other publicly traded grocers, namely the rivals of the Big 4 Tesco and Sainsbury’s.
Patryk Basiewicz, analyst at financial services firm FinnCap, said CD&R’s rejected offer helped give credence to the idea that there is still long-term value left in the UK financial sector. grocery.
Morrisons had rejected CD & R’s offer after the board “unanimously concluded that the conditional proposal significantly undervalues Morrisons and its future prospects.”
So why exactly was the grocer “undervalued” the first time around?
Andy Halliwell, senior client partner at digital transformation consultancy Publicis Sapient, said: “Grocery is not a growing industry. It’s about trying to manage operational costs and occasionally and opportunistically steal market share, so dividends are generally low but stable.
“However, the markets had ignored some of the more interesting steps Morrisons had taken over the past two years with its partnership with Amazon and ownership of its manufacturing and supply chain – this is an opportunity for one. private investor to sell and make a bigger profit.
Just last weekend Morrisons wrote to his network of 3,000 farmers to reassure them that a Fortress take-over bid would still protect its agreements and relationships with suppliers.
Unusually for a large UK supermarket, Morrisons owns and deals directly with its farmers to stock their shelves, rather than relying on wholesalers. This undoubtedly helped the grocer at a time when supply chains were severely disrupted by the Covid-19 pandemic.
Farmers’ concerns emerged shortly after Labor warned a takeover by private equity Morrisons could threaten the future of thousands of jobs and risk the potential for asset stripping. Labor also urged the government interfere in any takeover of Morrisons secure binding promises regarding the retailer’s future and job security.
In his letter to the farmers, Morrisons chief executive David Potts sought to allay their fears by stating that Fortress would be a “proper and responsible owner.” He also said that Fortress’s commitments to the future of Morrisons “carry real weight” and that they will protect the character of the company and its relationships with its suppliers.
Potts would also be expected to meet business secretary Kwasi Kwarteng this week to discuss the potential takeover and allay other concerns.
Despite this, Basiewicz believes Morrisons could benefit from a change in ownership. He also said that privatization allows retailers to “adapt and have the privacy to face the current challenges of the industry landscape”.
“It also gives them the flexibility in terms of capital allocation (or payment policy) that UK public markets, in particular, are unwilling to digest,” he said. Retail Gazette.
“Grocery stores should be private“
However, Charles Allen, global retail researcher at Bloomberg Intelligence, said it would be difficult to see what a new owner could do differently to improve Morrisons operational performance.
“Maybe if Amazon got involved in the bidding, we would see a different direction that could be beneficial,” he added.
It’s still unclear if and when buyers would change their shopping experiences at Morrisons. In his full-year trade update for the year ending January 31Morrisons revealed that profits had been cut by more than half after being hit by £ 290million in total costs linked to the pandemic.
The Big 4 grocer told investors profits before taxes and windfall costs fell 50.7% to £ 201million for the year. He also said he had been affected by higher than expected pandemic costs after a recent increase in absences, as well as the £ 230million impact of returning his business rate relief to the Treasury.
Sales at constant scope for the year – excluding fuel and VAT – jumped 8.6% as they were driven by strong demand for groceries and the possibility of keeping stores open due to its “essential” status . In the fourth quarter of this year, which included the peak Christmas trading period, Morrisons saw 9% growth in sales on a like-for-like basis.
Despite this, total annual revenue grew only 0.4% year-on-year to £ 17.6 billion – but Morrisons said online sales tripled in the year while its capacity had quintupled.
The retailer’s free cash outflow was £ 450million, compared to Morrisons’ inflow of £ 238million in the previous year, due to lower profits and the temporary impacts of the lower fuel sales, increased inventory and immediate payment to small suppliers.
In her first trimester For the current fiscal year, total sales grew 5.3%, while like-for-like sales – compared to the pre-pandemic era in 2019 – jumped 8.7%.
Morrisons has long been involved in the grocery price war, thanks to the rise of discounters Aldi and Lidl. But there are now fears that an owner of a private equity firm could lead to higher prices for consumers – and possible job cuts. Selling assertions is a typical private equity transaction, as is cost cutting, of which layoffs are a big part.
Morrisons has 18 manufacturing sites, making it one of the largest fresh food suppliers in the country, producing fresh bread, seafood, fresh produce, and more. There were concerns that CD&R might seek to sell Morrisons real estate properties, before re-letting them in order to produce a quick return on their investment.
For an industry that has faced many challenges over the past year, it’s no surprise that Morrisons staff and farmers have voiced concerns even when Fortress’s offer came with a pledge. to protect them.
Halliwell said investors no longer view grocery stores as low-interest, low-value stocks.
“Hopefully this will mean that grocers can more easily raise capital so that they not only defend themselves against disruption caused by digital insurgents like Amazon and Ocado, but can instead start fighting against them. “, did he declare.
Nothing is set in stone yet. The British will have to wait to see what changes could be implemented and whether the business will improve with a new owner – if the bidding process were to be completed any time soon.
And if Fortress’s takeover of Morrisons continues, there are discussions that Sainsbury’s or Tesco could be next on the list – especially after Asda went private this year when TDR Capital and billionaire brothers Issa bought a controlling stake in the Walmart grocer.
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