October 23, 2021

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CD&R/Wm Morrison: more of what matters for shareholders sets buyer a cheese paring challenge

Wm Morrison Supermarkets PLC updates

Clayton, Dubilier & Rice has raced ahead in the supermarket sweep. The US private equity firm, battling it out in a bidding war, is offering 285p a share for Wm Morrison, a massive jump on its starting approach of 230p.

Whoever wins will have to wring a lot of value out of this low-margin, low-growth supermarket chain. But when it comes to cheese paring, buyout executives make grocers look like rank amateurs.

CD&R’s offer is comfortably above the last bid from rival Fortress at 272p a share. The offer represents a premium of about three-fifths to the undisturbed three-month average share price. Yet shareholders do not see it as a knockout: on Friday shares were trading higher still, at 291p.

Including debt — £1.37bn of lease liabilities and a tad less net debt (stripping out one-offs) — the offer values Morrisons at 8.6 times this year’s consensus ebitda, according to S&P Global data.

The bidders, aware of private equity’s unpopularity, play down talk of financial engineering. CD&R has ruled out “material” sales and leasebacks of Morrisons’ numerous freehold properties. It knows the value of not paying rents.

That puts the focus on lifting earnings. Morrisons, the UK’s fourth biggest supermarket, is a tightly-run ship but — to adapt Tesco’s slogan — every basis point helps.

CD&R’s portfolio includes Motor Fuel Group, a forecourt operator of 900-plus sites. That paves the way for synergies both on fuel and accompanying convenience stores, which could distribute Morrisons foods — at least for so long as most UK cars rely on petrol. CD&R could equally sell the food manufacturing business.

Morrisons would also be valued more highly if it had bigger online sales — albeit that these, at a tenth of the total, can hardly make much profit at the moment.

No quick flip looks possible. The ultimate owner may find themselves on the hook for longer than private equity’s preferred three to five-year timeframe. The enthusiasm of bidders points to value in Morrisons that stock market ownership failed to unlock — and to the huge weight of funds propelling US buyout groups.

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