A takeover of Bradford-based supermarket giant Morrisons by either of its two potential buyers would “materially weaken” the security of the company’s £5.5 billion pension schemes if no additional protection are agreed, pension trustees have said in a letter to the company.
Morrisons last week agreed a takeover offer worth £7 billion from US private equity group Clayton, Dubilier & Rice (CD&R) — and scrapped its earlier recommendation of a £6.7 billion bid from a consortium led by Fortress Investment Group.
Fortress said it is considering its options and that shareholders of Morrison should “take no action.”
CD&R’s offer is worth 285p a share in cash, trumping the 272p a share cash offer from the Fortress group.
Morrison’s shares have risen to around 292p, suggesting some investors expect a higher bid.
The trustees said that an agreement “on the mitigation to be provided for the schemes” should be settled with CD&R or Fortress (as appropriate) “prior to any shareholder meeting to consider any offer for Morrisons.”
Steve Southern, chair of trustees for the Morrison’s Retirement Saver Plan and the Safeway Pension Scheme, said: “An offer for Morrisons structured along the lines of the current offers would, if successful, materially weaken the existing sponsor covenant supporting the pension schemes, unless appropriate additional support for the schemes is provided.
“We hope agreement can be reached as soon as possible on an additional security package that provides protection for members’ benefits.”
Morrisons said: “Morrisons places significant emphasis on the wider responsibilities of ownership of the Morrisons business and recognises that the Morrisons Retirement Saver Plan and the Safeway Pension Scheme are a major part of that.
“Morrisons has a long-established pension strategy, which has been agreed with the trustees, a key aim of which is to ensure that the security of members’ benefits in the pension schemes is appropriately protected.
“Morrisons is supportive of the parties reaching an agreement which protects and supports the pension schemes in an appropriate manner, and will continue to work with all parties to achieve this as soon as possible.”
The statement from the pension trustees said: “Whilst the schemes are currently in surplus on an ongoing funding basis and also benefit from security in the form of freehold properties held within a pension funding partnership structure, the schemes currently do not have sufficient resources (inclusive of the current security) to secure, or ‘buy out’, scheme benefits with an insurance company.
“The schemes’ long-term objective in each case is to reach full funding on a ‘buy out’ basis in less than 10 years, which the trustees currently believe is possible without requiring cash contributions from the Morrisons group beyond those already agreed.
“But whilst a ‘buy out’ deficit remains, the schemes are dependent on the Morrisons group companies that participate in the schemes to support members’ benefits (such support is known as the ‘sponsor covenant’).
“Should those companies become insolvent the schemes would have unsecured creditor claims against those companies for what is known as the ‘Section 75 deficit’ which is assessed on a ‘buy out’ basis.
“In the event that an offer for Morrisons completes on the basis of the terms of either the Fortress Offer or the CD&R Offer, the trustees together with their advisers believe that, on the basis of the information available to them, the Relevant Offer would, if no agreement is reached to provide additional protection for the schemes, materially weaken the existing sponsor covenant supporting the schemes as a result of several factors.
“These factors include the introduction of additional debt secured with a priority claim ahead of the schemes on the majority of the Morrisons group assets, the related increased debt service burden and potential future corporate activity, including the potential for refinancing and restructuring.
“The trustees are therefore focussed on agreeing additional security to provide covenant support for the schemes on their journey to ‘buy out’.
“Prior to CD&R’s 19thAugust announcement, discussions had been ongoing with Fortress since their offer announcement on 3rd July 2021.
“The trustees and CD&R have not had the same opportunity to progress discussions as yet.
“A helpful introductory meeting took place between CD&R and the trustees immediately prior to the announcement of their offer on 19th August and the trustees look forward to productive discussions leading to agreeing an appropriate mitigation package with CD&R as soon as possible (and with Fortress should it continue to pursue an offer for Morrisons).
“The trustees are of the view that an agreement on the mitigation to be provided for the schemes should be settled with CD&R or Fortress (as appropriate) prior to any shareholder meeting to consider any offer for Morrisons.”
CD&R said in a statement: “CD&R has a long history of successfully partnering and caring for the wide stakeholder constituencies of its portfolio companies and its focus is on building strong, sustainable businesses for the benefit of all stakeholders.
“Consistent with this approach, CD&R and Bidco have set out a number of intentions as part of the CD&R Offer in relation to pension rights, the future funding arrangements of the schemes and their desire to engage in a constructive and timely dialogue with the trustees.”
CD&R said the existing pension rights of all Morrisons’ management team and employees of Morrisons will be fully safeguarded and it does not intend to make any change to the benefits provided by the schemes.
It confirmed that its intention is for employer contributions to the schemes to continue in line with current arrangements and that it “looks forward to constructive engagement” with the trustees in the future.
“Since its initial proposal was submitted to the board of Morrisons on 14 June 2021, CD&R has consistently acknowledged and appreciated that the schemes and the trustees are important stakeholders in Morrisons,” said CD&R.
“Since that time CD&R has sought guidance from the board and management team of Morrisons on the appropriate opportunity to engage the trustees to explain to them CD&R’s proposal for Morrisons and its strategic vision for the business and intentions for stakeholders.
“CD&R met the trustees on 17 August 2021 to initiate this dialogue and process.
“CD&R believes that it had a positive discussion with the trustees and the dialogue is now progressing.
“CD&R intends to continue this dialogue to ensure that the trustees understand and support the sponsor covenant following the completion of the CD&R offer.
“CD&R understands and accepts that the trustees consider this dialogue is likely to extend to considering arrangements which provide additional security to the schemes through an appropriate mitigation package.
“Given their position as important stakeholder in Morrisons, CD&R looks forward to further positive engagement with the trustees and to providing the appropriate support to the schemes and its members.
“A further announcement will be made if and when appropriate.”