US private equity firm Clayton, Dubilier & Rice is set to push ahead with its pursuit of UK supermarket chain Wm Morrison despite its initial approach being rebuffed over the weekend, people close to the transaction said.
The firm approached Morrisons with a 230p-a-share offer last week, giving the UK’s fourth-largest supermarket group an enterprise value of £8.7bn.
Morrisons said on Saturday that it had rejected the approach, which it believes “significantly undervalued” its business and prospects.
One person with knowledge of the deliberations at Morrisons said that the management team were “happy to continue as a plc”, but recognised that every company is for sale at the right price.
Both Morrisons and CD & R, which has until July 17 to make a firm offer, declined to comment. Silchester, Morrisons largest shareholder with a 13 per cent stake, also declined to comment on its intentions regarding the bid.
People close to the discussions said CD & R would now wait to gauge investor reaction and signs of any political pushback before deciding on its next steps.
Analysts said the unusual structure of Morrisons, which has one of the UK’s largest food manufacturing businesses and owns 85 per cent of its 497 stores, could justify a higher offer price.
They also drew comparisons with Asda, the UK’s third-largest supermarket chain with a similarly high level of store freeholds, which was sold to petrol station billionaires Zuber and Mohsin Issa and private equity firm TDR Capital earlier this year.
“I think the property alone is enough to fund the M&A. Everyone will be looking at the Issa brothers, who will essentially own Asda for no cash [outlay] . . . once they have sold the logistics portfolio,” said one person who has looked at the Morrisons store estate. “It’s quite compelling”.
The takeover of Asda will probably result in the opening of Asda convenience stores in the EG Group petrol stations owned by the Issas. That could provide a model for CD & R, which owns a stake in EG’s rival Motor Fuel Group.
Another analyst said 250p a share was probably the price beyond which negotiations would become serious, and pointed out that Silchester acquired much of its stake at prices above 200p a share.
Morrisons’ high level of store ownership and its commitment to vertical integration were both articles of faith for Sir Ken Morrison, the son of the group’s founder who built the company from a few stores in West Yorkshire into a national chain.
Morrison died in 2017 and his stake in the company was distributed among various family trusts. But the current management team, led by chief executive Dave Potts, views store ownership and food manufacturing as strengths and would be reluctant to suggest dismantling them as part of any takeover defence.
Although Morrisons has navigated the pandemic well, “they have not been doing brilliantly well lately and the share price performance has been underwhelming for some time”, one analyst said. The shares were relegated from the FTSE 100 at the last index review in March.
Potts, who is 64, is now the longest-serving chief executive among the big four supermarkets, having taken over in 2015. Like chair Andrew Higginson and chief operating officer Trevor Strain he worked with Sir Terry Leahy — now an adviser to CD & R — when Leahy was running larger rival Tesco.
However, the person with knowledge of the Morrisons deliberations, played down the personal connection. Leahy “put in a courtesy call” ahead of the approach but has not been directly involved in talks, they said. “They respect each other greatly, but they’re not big mates.”
Additional reporting by Arash Massoudi and Kaye Wiggins