Morrisons accepts £7bn from US private equity group – what does this mean for the future of the company?

Supermarket chain Morrisons looks set to be acquired by Clayton, Dubilier & Rice (CD&R) after the US private equity offered an improved takeover bid of £7bn.

Morrisons had previously turned down a takeover bid worth £5.5bn from the firm in July, saying that it significantly undervalued the business. However, despite now accepting their improved offer, the bidding war for Morrisons is not yet over.

“Another offer from Clayton, Dubilier & Rice has reignited the bidding war for Morrisons”, says Nicholas Hyett, Equity Analyst at Hargreaves Lansdown.

“The improved offer has got the backing of management, and a higher price might seduce some shareholders who were previously sceptical about whether the company was being sold at the right price.

“This might not be the end of the story. Rival bidder Fortress has urged investors to hold fire on accepting the deal and are expected to make a further statement in due course.

“With the shares currently trading above the new and improved offer price, the market clearly thinks a better offer is a distinct possibility.”

Whether Morrisons is taken over by CD&R or Fortress, which are both US investment firms, it will be interesting to see how a change to US ownership will affect the business and its customers going forward.

This takeover is also part of a bigger trend emerging in the UK; according to data company Dealogic, private equity firms have announced 124 deals for UK companies (both takeovers and minority stakes) with a combined value of £41.5bn so far in 2021. That was the highest value of deals by this point in the year since it started tracking transactions in 2005.

What could the takeover mean?

At first glance, the takeover looks to be a positive move for Morrison’s investors, with share prices rising 4.4% following the announcement to 291.4p per share.

CD&R has pointed out that one of the reasons for their offer was the company’s strong heritage and have said they are ‘committed to supporting Morrisons to capitalise on these foundations and to execute successfully the current strategy to deliver both growth and profitability.’

CD&R has also dedicated significant resources to develop an in-depth understanding of the Morrisons management team’s vision for the business and is committed to supporting the existing team in continuing to execute its – 4- strategy, including the “Fix, Rebuild, Grow, Sustain” strategy, which has served the business and its stakeholders well.

This suggests that CD&R does not plan to shake things up too much and will focus on building on what has worked well for Morrisons in the past instead.

However, Morrison’s recently posted their half-year results, which showed profits had fallen 43%, which led to the company announcing that they are expecting product shortages and price rises across the industry.

“There is a disappointing headline number with profit before tax and exceptionals falling 37% to £105 million in the first half,” said Susannah Street, Senior Investment and Market Analyst Hargreaves Lansdown.

“The closure of in-store cafes and lost sales in fuel and takeaway snacks was an £80 million hit and extra Covid expenses nibbled away another £41 million.”

“The company reckons these troublesome costs will largely evaporate in the second half and profit for the year will beat last year’s £431 million. Certainly, two year like for like sales growth of 8.4% is encouraging.

“Also, the acceleration of the Morrisons rebrand roll out to McColls stores and the expansion of Morrisons on Amazon is a welcome trend, with opportunities to significantly increase online sales. But there could be hiccups on the way to a higher profit trajectory, given the looming supply chain issues for the industry.”

It is important to recognise that CD&R has enjoyed successful partnerships with British companies in the past; since the company acquired a significant stake in B&M in 2012, over 200 new stores have opened and its revenues more than doubled.

So, if lightning were to strike twice, this could mean fruitful returns for Morrison’s investors.

However, according to Dr Gordon Fletcher, Retail Expert at the University of Salford Business School, the takeover may not be such a good thing.

He commented: “Experience and evidence from other recent private equity capital purchases this latest event creates the real risk that increased pressure will be put on Morrison’s customer service.

“With a focus on realising the untapped value of Morrisons that has little to do with shopping, the interests of the private equity group and its shareholders will be prioritised over the consumer experience.

“Evidence from previous private equity purchases is that corporate actions shift from the customer towards maximising the overall profit made from the next sale to another buyer.

“In the case of Morrisons, the existing relationship with Amazon points to this goal. Maximising this profit involves reducing current costs and limiting investment, maintenance or new product developments. It is the customer who then primarily suffers in this situation.”

With Morrisons’ HQ potentially moving from Bradford, its home since the company was founded in 1899, to the US, far removed from Morrisons’ customer base, it will be interesting to see what this means for the company, its staff and customers going forward.

Why are foreign investors investing in Morrisons and other UK businesses?

Dr Gordon Fletcher continued: “The private equity company will have done its calculations and knows the scale of the untapped value lying in the brand, its physical properties, undervalued share price and the potential of further closer working ties with Amazon.”

“Other external factors including a persistently weaker pound against the dollar will make UK companies more attractive to US buyers. The sum total of these considerations far exceeds £7bn over a relatively short period of time.”

At the start of 2021, the pound was approximately 15% weaker relative to the Euro than it was on the eve of the EU referendum in June 2016.

As a result of the low value of Sterling, The Guardian reported in 2018 that the value of deals involving US companies buying UK businesses was £79bn in 2017-18, more than double the amount from the previous year (£36.8bn).

Therefore, this trend appears to have continued since then, with defence contractors Meggit and Ultra also currently the subject of bidding wars from foreign investors amongst other companies.

Unless the pound somehow manages to crawl its way back to its pre-EU referendum value soon, which seems unlikely now the UK is officially out of the EU and the pandemic is not yet over, UK companies should, perhaps, anticipate further bidding wars from foreign investors in the near future.

Is foreign ownership of UK businesses a good thing?

Of course, if the trend of foreign investment is set to continue, there is a debate over whether it would be good for the UK to have so many foreign-owned businesses.

As pointed out by Dr Gordon Fletcher, “The challenges of transnational ownership are complex ones. And a situation that is made particularly stark with the actions and behaviours of the most popular multinational social media companies.

“Good corporate citizens irrespective of their nationality translate into good owners with benefits of all types being shared locally and not simply shipped offshore.

“This includes utilising local suppliers with shorter supply chains rather than opting for familiar and cheaper suppliers from further afield. The price to the company may be less but the overall cost to the local economy and the environment in the long-term is significant.”