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On 19 June 2021, WM Morrison Supermarkets plc (Morrisons)  that it had rejected a possible cash offer from US private equity firm Clayton, Dubilier & Rice LLC (CD&R) to acquire the entire issued and to be issued share capital of Morrisons due to a significant undervaluation of Morrisons and its future prospects. At £2.30 per share, the offer values Morrisons at £5.5bn and is inclusive of a dividend of £0.05 per share. The bid represents a 29% premium to the closing price of Morrisons on Friday and news of the bid saw Morrisons’ share price jump by 35% at the close of business on Monday.

Given Morrisons’ recent comparatively poorer performance and over £7bn in assets (including a strong freehold property portfolio), an approach from a bidder is perhaps unsurprising. In its annual report, Morrisons   a 50% reduction in profits before tax owed to COVID-19 costs of £290m and its share price performance saw it demoted from the FTSE 100 to FTSE 250 this March (see:  FTSE 350 quarterly reshuffle: which companies are weathering the COVID-storm? ). This undoubtedly contributed to the huge backlash seen at this year’s AGM, with 70.12% shareholders voting against the resolution to approve the bonus and reward payments in the directors’ remuneration report (see:  AGM season déjà vu as director’s remuneration fails to check out ).

CD&R appears to be stocking up on UK-listed companies, having to acquire FTSE 250 UDG Healthcare in May 2021. CD&R is no stranger to the retail sector, having previously owned discount retailer B&M European Value Retail S.A. and turning around a £1.5bn profit following the company’s IPO in 2014. Former Tesco CEO, Sir Terry Leahy, acts as a senior advisor to CD&R and was previously appointed to chairman at B&M. Coincidentally, Morrisons’ management team consists of Tesco alumni, CEO David Potts, who sat on the board of Tesco and chairman, Andy Higginson, who was the former finance director.

This is not the first time that private equity has been interested in UK supermarkets. TDR Capital and the Issa Brothers had closed a deal for the takeover of ASDA earlier this year and was subject to CMA regulatory concerns over high petrol prices given joint ownership of EG Group Limited, which operates petrol stations. Parallels can certainly be seen in this bid, with 338 petrol stations operated at Morrisons and CD&R’s ownership of petrol station operator Motor Fuel Group. A similar shakeout of the regulatory concerns may therefore appear again should an offer from CD&R be accepted.

Morrisons’ partnership with Amazon undoubtedly contributed to the success of its online sales, which more than tripled by the start of Q4 2020. With Amazon’s previously unexpected purchase of Whole Foods, the recent expansion of Amazon Fresh in London, and the existing partnership with Morrisons, it’s perhaps unsurprising that a bidding war may break out.

Morrisons is the largest direct supermarket customer for British farmers and the second largest fresh food manufacturer in the UK. Though the UK government has made no announcements in regard to the takeover bid as of yet, the attempt may be thwarted, with Labour calling on the government to intervene over concerns of the asset stripping reputation of private equity that may put 118,000 employees at risk.

CD&R has until 17 July 2021 to announce a firm intention to make an offer or withdraw its interest.

Market Tracker will continue to monitor this transaction as it develops.