Morrisons Shouldn’t Surrender in Another Depressing Takeover Saga | Nils Pratley
The stock market is brutal and quickly gets to the main issue. If 230 cents a share isn’t enough to persuade Morrisons directors to turn around and accept private equity money, what is it?
The working hypothesis is that the ‘death ground’, in the charming jargon of the investment banker, is around the 260p mark – enough to allow the board to claim a stupendous increase from the 178p of the last week, and not too much to jeopardize Clayton, Dubilier & Rice’s heavily indebted financial model. Morrisons Monday closing action of 240p fits the scenario: the market expects a deal.
But let’s hope this saga holds some surprises, like stiff resistance from the Morrisons boardroom or from shareholders. This latest attempt by private equity to foray into the stock market is depressing. Basically, it looks like an old-fashioned leveraged buyout in which Morrisons staff – and poor old buyers – will be an afterthought.
We could go further. Now that Asda has been bought through a similar leveraged model, and with buyout speculation swirling around Sainsbury’s, it’s not hard to imagine how 40% of the UK grocery market could fare. come under the control of financial owners. From a competition point of view, that would be a disaster. Private equity firms don’t wage price wars. Slightly increasing profit margins, snatched away from customers, are much better at paying down debt.
Morrisons is not a company that needs a new direction, a new strategy or even access to capital. It has a simple model that throws money away when the business is well run, which has been the case in recent years.
Profits from this fiscal year are expected to beat by far those of the last year leading up to the pandemic and, even including a Covid year, shareholders have collected £ 1bn in dividends since 2017. The current balance sheet also appears to be weather-proof. bullets. Net debt of £ 1.8bn, not including rental debt, will decline rapidly when the unique elements of Covid reverse. The group owns 85% of its assets, assets which have stopped depreciating. There is even a surplus in the pension fund. The company operates in its current form.
The big problems are the lack of growth opportunities and a depressed stock price. The latter created the opportunity for CD&R to take a pop, but it’s hard to see how the bidder could credibly claim to be able to better handle Morrisons. Yes, Sir Terry Leahy, former Tesco boss, is said to be installed as non-executive chairman, but the current former Tesco crew in the Morrisons boardroom seems to know what he’s doing.
CD&R has ideas on setting up a chain of gas stations it already owns and opening a few convenience stores in the forecourt, but these will be additions to the core exercise of the gymnastics of debt and real estate transactions. The Issa brothers and TDR Capital have shown what is possible by financing their buyout of Asda with junk bonds at remarkably low interest rates, but anyone can leverage. Andrew Koch, senior fund manager at Legal & General, was right when he said private equity “won’t add any real value” by flogging property and paying itself out in cash.
If Andrew Higginson, the chairman of Morrisons, wants to fight for independence, or even just for a decent price, he must appear more indignant. The late Sir Ken Morrison is said to have spat in fury now, rallying shareholders to recognize the strengths inherent in Morrisons. The few passwords that emerged from Bradford HQ over the weekend were too timid.
Higginson could try to model his own sale-leaseback structures, if that’s what the shareholders want. Prepare at least one dossier on the real estate portfolio, including its holdings. And call Amazon to see if it’s interested in purchasing an equity stake to add to its online partnership agreement. David Potts, the managing director, could do his part by expanding on his recent chorus on a ‘renaissance’ for UK supermarkets. What does he think this means for mid-term dividends? Sketch out a few scenarios to distract from the low market rating of the entire supermarket industry.
Berenberg analysts have also calculated that CD&R would still be able to achieve an internal rate of return of 19% if it paid 270 pence per share. The Morrisons board should take this as a challenge. Don’t capitulate on the cheap or be fooled by fictitious wholesale buyout bonuses. Morrisons is a good company and independence suits him.