In early October, Clayton Dubilier & Rice (CD&R) completed a successful bid for WM Morrison’s group, beating Softbank-owned Fortress Investment Group in a fiercely competitive process. With the deal expected to be completed in the coming weeks, the transaction values the grocery business at 9.95 billion GBP. The completed takeover will mark the end of a four-month process that began when the supermarket rejected an initial 5.52 billion GBP offer from CD&R in June of this year.
CD&R’s winning bid price of 287p was only a penny per share higher than the bid of the consortium led by Fortress, the owner of specialist wine retailer Majestic Wine. Before the final auction process, CD&R were also able to gain an advantage in negotiations, where they reached an agreement with Morrisons to transfer additional property into the supermarket’s defined benefit pension scheme.
The final bid price represents a 61% price premium compared to the Morrisons share price before the bidding wars began.
WM Morrison’s group, which operates as Morrisons, owns 497 superstores across England, Wales and Scotland, employing 110,000 workers and serving 11 million customers per week. It is the UK’s fourth-largest supermarket group by market share behind Tesco, Sainsbury’s and Asda. The takeover will mark the first time the company has been a private firm since before its listing on the London Stock Exchange in 1967.
The transaction follows a greater trend of private equity interest in the UK supermarket sector. In February 2021, Asda was purchased by TDR Capital and billionaire brothers Mohsin and Zuber Issa. What may be attracting investors, particularly those from the US, is the price of such businesses. The price-to-earnings ratio of the FTSE 100 index is much lower than that of the S&P 500, with the total return of the FTSE 100 in the past five years being 26% compared to 125%, according to Bloomberg. Dragged down by factors such as Brexit, the UK has recently been offering investors businesses for cheap prices. Supermarkets have also undergone a significant digital transformation during the COVID-19 pandemic with the development of e-commerce and online delivery. This has allowed for resilience in their revenues during turbulent economic times, especially compared to other sectors, making the industry particularly attractive to private equity investors.
Morrisons is not CD&R’s first major investment in the UK. Also in their portfolio is Motor Fuel Group, the UK’s leading independent forecourt operator, which owns over 900 sites. This would result in a total of 1200 forecourt sites if the two businesses were combined. This presents another similarity to the recent Asda transaction since the Issa brothers also own EG group, a worldwide petrol station operator. This suggests that the investors in these deals believe that there is value to be unlocked in combining supermarket and forecourt businesses, with investment bank Berenberg saying that the potential synergies appear to be a key rationale in CD&R’s offer.
CD&R may look to unlock value by combining the two businesses, including using Morrisons’ wholesale buying power at convenience stores at forecourts. However, the deal for Asda to sell its forecourts to EG Group came under scrutiny from the Competition and Markets Authority due to concern about EG group having excessive power in the UK forecourt market. As a result, Asda had to withdraw the sale of 36 of its forecourts to EG and keep them under the ownership of the supermarket.
As well as its forecourt investments, CD&R already has experience in the UK retail space. The firm paid 500 million GBP for a 60% stake in the discount retailer B&M in 2012. During its ownership of the company, the revenues of B&M doubled and over 200 new stores were opened. The company was publicly listed in 2014 and has significantly outperformed relevant indices since the listing.
The acquisition represents CD&R’s confidence in the UK economy, driven by Morrisons’ stable cash flows, strong real estate position and arguably low valuation. The private equity firm may be able to use its expertise in UK retail and its other current investments in the British forecourt sector to realise synergies and business development opportunities that other investors may have been unable to up till now. However, larger factors in the UK economy, such as supply chain issues as we leave the EU and recover from COVID-19, may pose challenges that CD&R will have to face in the future.
By Archie MacKechnie
Sector Head: Hortense Comon