Clayton, Dubilier & Rice has increased its offer for Wm Morrison to 285p per share, in the latest round of a protracted bidding war for the UK’s fourth-largest supermarket group that highlights the appeal of British companies to private equity firms.
The supermarket’s board had previously recommended a bid of 270p a share plus a 2p per share special dividend, from a consortium led by SoftBank-owned Fortress Investment Group.
On Thursday night, Fortress said it was “considering its options” and urged Morrisons shareholders to take no action.
CD&R, which counts former Tesco chief executive Sir Terry Leahy among its advisers, said on Thursday that it was “delighted to have the opportunity to support the management of Morrisons in executing their strategy to grow and develop the business”.
“CD&R values Morrisons’ distinctive business model and is committed to supporting it, including the successful [environmental, social and governance] and broader stakeholder engagement strategies of the company that are essential to its continued success,” said Leahy.
Andrew Higginson, Morrisons’ chair and a colleague of Leahy during his spell at the helm of Tesco, said the US private equity firm’s offer “represents good value for shareholders while at the same time protecting the fundamental character of Morrisons for all stakeholders”.
The price comes at a 60 per cent premium to the last close of Morrisons’ shares before the original CD&R bid was revealed. It values the group’s equity at £7bn, compared with £6.7bn under the Fortress proposal. Morrisons also has £2.7bn of net debt, according to the CD&R statement.
Funds managed by CD&R will put in over £3.4bn of equity initially, with debt finance provided by Goldman Sachs, Bank of America, Mizuho and BNP Paribas.
If successful, the transaction would also reunite Leahy with chief executive Dave Potts and chief operating officer Trevor Strain, both of whom worked under him at Tesco.
Morrisons’ board first recommended a 252p-a-share bid from Fortress last month, but Fortress pre-emptively raised it weeks later in a move designed to derail CD&R and respond to shareholders who had indicated they would not accept its earlier bid.
Morrisons has now withdrawn its backing for the Fortress proposal and adjourned the shareholder meeting to approve it, which had been scheduled for August 27.
Investors are now expected to vote on the CD&R proposal — also structured as a scheme of arrangement requiring 75 per cent approval from those shareholders voting — in early October.
If Fortress remained interested in a deal, one option would be for the Takeover Panel, which oversees UK mergers and acquisitions, to take the relatively rare step of arranging an auction process to bring the bidding war to a head.
CD&R said it “recognises the strength of Morrisons’ heritage, the legacy of [founder] Sir Ken Morrison and its long-term track record of working with and for customers and stakeholders”.
It has not made specific pledges on pay rates, pensions, the location of the group’s headquarters or freehold properties but stated that it did not anticipate making major changes to the company’s modus operandi. It will also retain the existing Morrisons management team.
CD&R also owns Motor Fuel Group, which operates over 900 filling stations in the UK, and said there was “a potential opportunity for a commercial operational partnership between Morrisons and MFG that could accelerate the development of Morrisons’ wholesale business and convenience portfolio through supply and branding arrangements”.
The overlap in the retail fuel market is likely to attract scrutiny from the Competition and Markets Authority, which had previously indicated that it had no major issues with the Fortress proposal. The CD&R bid will lapse if the competition regulator refers it for a detailed phase-two inquiry.
Following a series of missteps in the aftermath of the financial crisis, the three quoted UK supermarket groups had all benefited from a five-year period of restructuring and cost cutting that left them comparatively well placed to weather the Covid-19 pandemic.
However, their share prices had largely failed to respond, leaving many analysts warning that their improving cash flows and low valuations would leave them vulnerable to opportunistic bids from financial buyers.
Asda, the UK’s third-largest grocer, was sold to TDR Capital and the billionaire Issa brothers earlier this year. The £6.8bn deal was overwhelmingly funded by debt, highlighting the appeal of supermarkets’ reliable cash flows and extensive property assets.