The news that Clayton, Dubilier & Rice made a £5.5 billion (€6.4 billion) bid to take over Morrisons has sent the rumour mill into overdrive, with Amazon once again named as a potential rival suitor for the UK's fourth-biggest grocer, in a move akin to its acquisition of US grocer Whole Foods.
However, according to Andy Halliwell, senior director at digital consultancy Publicis Sapient, while Amazon has long been associated with a possible swoop for Morrisons, the timing might not be ideal for the online giant.
"It may just be too soon for Amazon to commit to the UK marketplace – where they’ve traditionally preferred a more staggered, test and learn approach, and ultimately I don’t believe they’re interested in owning such a large amount of real estate," he said.
However, he added that an Amazon offer "would almost certainly be preferred by existing shareholders, and the offer could be comparatively cheap for Amazon if they offered an appealing mix of cash and shares rather than a pure cash-buyout."
Clayton, Dubilier & Rice Offer
Clayton, Dubilier & Rice's bid for the business was described by Morrisons' board as 'significantly undervaluing' the company, and while there are no signs yet that a bidding war may commence, the company's share price rose yesterday amid rumours that buyout fund Apollo was also considering tabling a bid.
One of the appealing factors of Morrisons, Halliwell notes, is the fact that the grocery has a high level of control over its supply chain, "all the way back to the producers and farms that supply it, as well as the manufacturing of many of their own-brand goods for stores, which is an asset at a time when supply chains are challenged by a combination of COVID-19 and Brexit".
Even if a successful bid doesn't materialise, the current situation is likely to pave the way for a restructuring of Morrisons in the near future, potentially with assets being sold off and a consolidation of the business, Halliwell adds.
"With layoffs at Sainsbury’s recently as well, the supermarket industry is seeing significant pressure on recruitment, talent and long-term stability. It will be fascinating to see how things evolve in the next few months.”
Morrisons Is Positioned Well
According to analyst Russ Mould of AJ Bell, Morrisons has done "a lot of hard work" in recent years to see off competition from its rivals, however its share price has not reflected its efforts, which may have prompted CD&R to inquire about the company's availability.
“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," he said.
As of last Friday, Morrisons had shareholder equity of £4.2 billion, according to the last set of accounts and a market value of £4.3 billion, Mould added, "meaning the company 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."
As to whether Amazon could also be considered a potential buyer for the business, Mould added that it is an "obvious name to watch".
Under UK takeover regulations, CD&R now has until 17 July to table a firm bid for Morrisons.
© 2021 European Supermarket Magazine. Article by Stephen Wynne-Jones. For more Retail news, click here. Click subscribe to sign up to ESM: European Supermarket Magazine.
