Shares of Bradford-based supermarket giant Morrisons soared more than 30% to around £2.35 on Monday following the news at the weekend that it rejected a proposed £5.5 billion cash takeover offer from U.S. private equity firm Clayton, Dubilier & Rice (CD&R) pitched at £2.30 a share.
CD&R, which has former Tesco boss Terry Leahy as a senior adviser, now has until 5pm on July 17 to either announce a firm intention to make a firm offer for Morrisons or announce that it does not intend to make an offer.
The private equity firm’s offer puts Leahy up against Morrisons chairman Andrew Higginson and CEO David Potts, two of his former colleagues at Tesco.
Morrisons finance chief Michael Gleeson and chief operating officer Trevor Strain also previously worked at Tesco.
Silchester International Investors, one of the UK’s biggest boutique asset managers, is the largest shareholder of Morrison with a 15% stake.
Columbia Threadneedle owns a 7.38% stake in Morrisons, with Majedie and Schroders both holding stakes of about 4.9%.
“Strategically Morrisons has cemented an important relationship as a key supplier and partner to Amazon, and to McColls convenience stores,” said Mould.
“It has also established a successful online delivery service.
“Morrisons’ balance sheet has plenty of asset backing and the valuation was relatively depressed before news of private equity interest.
“The business had done a lot of hard work and put itself in a stronger position to continue fighting competitive threats, but the market hadn’t recognised this shift and the shares had languished due to concerns about the difficult environment in which Morrisons operates.
“The market value of the business had weakened so much that it clearly triggered some alerts in the private equity space to say the value on offer was looking much more attractive.
“As of the market close on Friday, Morrisons had shareholder equity of £4.2 billion according to the last set of accounts and a market value of £4.3 billion, so it was trading at pretty much one times book value – a good start for any value-oriented investor.
“There was a pension surplus, only £2.3 billion of debt and £1.3 billion of lease liabilities.
“Add all of those up and the enterprise value for Morrisons was £7.9 billion, yet the firm has £7.4 billion of property and assets on its balance sheet – prime private equity territory.
“Limited liabilities plus lots of assets offers scope for quickly releasing cash from the business.
“Other attractive facets include the firm’s heavily vertically integrated model – in tune with the zeitgeist when it comes to food provenance and environmental, social and governance trends.
“This is not to say Morrisons is a slam-dunk.
“But you can see the value case for the shares and that must be the key attraction for CD&R.
“The issue now is how the big shareholders respond and whether they – and the Morrisons board – feel they can squeeze out a higher bid or feel sufficiently confident in Morrisons’ strategy and long-term competitive position to spurn the offer altogether.
“The shares traded at 235p early on Monday which is higher than that 230p proposal from CD&R.
“The market therefore seems confident that the suitor will have to raise its offer price or someone else might step into the game and we’ll see a bidding war.
“Amazon has long been touted as a potential buyer for Morrisons to help give it a much stronger foothold in the UK grocery markets so that’s an obvious name to watch.”
In a stock exchange statement on Monday, Morrisons said: “The board of Wm Morrison Supermarkets plc notes the recent announcement by Clayton, Dubilier & Rice, LLC as manager of Clayton, Dubilier & Rice Funds XI (CD&R) and confirms that on 14 June 2021 it received an unsolicited highly conditional non-binding proposal from CD&R in relation to a proposed cash offer of 230 pence per Morrisons share for the entire issued, and to be issued, share capital of the company to be made by funds managed or advised by CD&R.
“The Conditional Proposal was subject to the satisfaction or waiver by CD&R of a number of pre-conditions including the completion of detailed due diligence and the arrangement of debt financing.
“The Conditional Proposal provided that Morrisons shareholders would also still receive the final ordinary dividend of 5.11 pence per Morrisons share announced on 11 March 2021.
“The board of Morrisons evaluated the Conditional Proposal together with its financial adviser, Rothschild & Co, and unanimously concluded that the Conditional Proposal significantly undervalued Morrisons and its future prospects.
“Accordingly, the board rejected the Conditional Proposal on 17 June 2021 …
“There can be no certainty either that an offer will be made nor as to the terms of any offer, if made, even if the pre-conditions referred to above are satisfied or waived …”
CD&R said in a stock exchange statement: “Clayton, Dubilier & Rice, LLC as manager of Clayton, Dubilier & Rice Funds XI notes the press speculation regarding a potential transaction involving Morrisons and confirms that it is considering a possible cash offer for the issued and to be issued share capital of Morrisons.
“Rule 2.6(a) of the Code requires that CD&R, by no later than 5.00 p.m. on 17 July 2021 (being 28 days after today’s date), either announces a firm intention to make an offer for Morrisons in accordance with Rule 2.7 of the Code or announces that it does not intend to make an offer, in which case the announcement will be treated as a statement to which Rule 2.8 of the Code applies.
“This deadline can be extended with the consent of the Panel in accordance with Rule 2.6(c) of the Code.
“This announcement is not a firm intention to make an offer and accordingly there can be no certainty that an offer will be made.
“A further announcement will be made if and when appropriate.”