Why we’re talking about . . .

Food fight: Morrisons in play

Britain’s fourth-largest supermarket has been targeted by private equity. Should we care?

When Andy Higginson’s phone flashed up with an old colleague’s name, it was clear to the Morrisons chairman “that it wasn’t going to be a catch-up about the good old days”, said Ashley Armstrong in The Times. Sir Terry Leahy, the former Tesco boss turned partner at US private equity firm Clayton, Dubilier & Rice, was delivering “a courtesy call” to alert him to a takeover bid. The £5.5bn offer (more than £8.7bn including debt) has put Britain’s fourth largest supermarket “in play”. In response, Morrisons shares “leapt by 35%” to over 240p – suggesting that investors are expecting “something tastier from the private equity outfit than its 230p sighting shot”, said Alistair Osborne in the same paper. There’s “no better place than a supermarket for a food fight. But how much of a scrap is CD&R up for?”

The attempted raid – which, if successful, would “mark one of Britain’s biggest leveraged buyouts since the 2008 crisis” – has sparked “a furious row” in the City, said the FT. Over the last “frenzied” six months, private-equity dealmakers “have announced bids for UK-listed companies at the fastest pace in more than two decades”, triggering a fierce dispute between “traditional fund managers”, who reckon they’re getting the goods far too cheaply, and “bullish dealmakers” sitting on huge pots of cash”. 

Britain’s corporate boards are caught in the middle. Let’s hope the Morrisons board puts up some resistance, said Nils Pratley in The Guardian. “Now that Asda has been bought via a similar leveraged model, and with takeover speculation swirling around Sainsbury’s”, 40% of the UK’s grocery market could end up under the control of financial owners – “a disaster” for “the poor old shopper”. Private equity houses don’t do price wars. “Gently rising profit margins, wrung from customers by stealth, are far better for making the debt repayments.”

This is actually “a property deal, not a retail one”, said Lex in the FT. Bradford-based Morrisons owns 85% of its 500 stores. Selling, then leasing back, just a quarter of those would raise “a quick return on investment” of £2bn. Shareholders should hold out for at least 280p. What makes the deal so significant is Morrisons’ “critical role in Britain’s food production”, said Alex Brummer in the Daily Mail. Its 18 food production centres source mostly from British farms, and are “responsible for some 25% of the UK’s food production”. The farm lobby has “bleated endlessly about the threat of the Aussie trade deal”. They’ll have “much more to worry about” if a private equity firm, with heavy debts and no long-term responsibilities, grabs hold of Morrisons.

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