Welcome to Structure Corner, a series of Spotlights where we use StructureFlow to help explain the complexity behind current and engaging commercial issues, harnessing the power of visualisation to do so. In this Spotlight, we’re taking a look at the Morrisons Takeover, and explaining some of the big issues arising from it.
What has been happening with Morrisons?
Since June of this year Morrisons, the UK’s fourth-largest supermarket chain, has been the subject of a fierce takeover battle. It has been contested by two American private equity firms, Clayton, Dubilier & Rice (CD&R), advised by former Tesco boss Sir Terry Leahy, and Fortress Investment Group (Fortress), owner of Majestic Wine.
After a series of increasing bids over the summer of 2021, CD&R has now emerged as the winning bidder following an auction process overseen by the Takeover Panel.
Morrisons has two attributes which has made it a potentially lucrative takeover target. Firstly, an expansive freehold property portfolio, which includes 85% of its supermarkets (see more on this below). Secondly, a partnership with Amazon, which underwent major expansion in August 2020, helping online sales increase 113% in the first quarter of 2021.
As a consequence, the bidding has been fierce. In May of this year, the company’s market capitalisation was around £4.3bn, but within months the bids have pushed the company’s value and the winning bid to over £7bn.
The role of the Takeover Code
During competitive bidding situations like this, the UK Takeover Code (the Code) comes into play. The Code is issued by the Takeover Panel, an independent body whose main purpose is to provide stability through public takeovers and to ensure that shareholders are treated fairly.
Takeover offers can lead to significant changes in share prices, and so announcements to the market must be made where an offer is made – or where there are rumours and speculation following an approach. This means that in situations such as the Morrisons takeover battle, the process becomes relatively ‘public’. Business journalists eagerly await the next stage of proceedings and the press reporting leads to a fascinating insight into the offer process.
The following shows an extract of how some of the relevant Code rules have applied in the Morrisons situation.
Why is the Morrisons takeover important?
Morrisons is a major UK retailer employing 118,000 people. Beyond this, the takeover is seen as an indicator for future private equity takeover bids for other UK supermarket chains, such as Sainsbury’s.
Private equity acquisitions of UK companies are booming at present – with 113 deals in the first half of 2021, at a combined value of £23.3bn, we are seeing the highest level of activity since 2007.
Some politicians and analysts see these developments negatively. They argue that private equity ownership models can impact the long-term prosperity and longevity of the business and bring increased risk due to the large amounts of debt taken on to fund the acquisition.
How might private equity ownership affect Morrisons?
One particular risk flagged in relation to Morrisons is the potential for a ‘sale and leaseback’ of part of Morrison’s huge property portfolio (as we noted above, Morrisons is the freehold owner of 85% of its 497 supermarket properties).
Through this financial mechanism, the new private equity owner might be tempted to extract cash through the sale of properties. CD&R has given assurances that it will not do this in relation to the supermarket premises, but if it does so later, this could leave Morrisons with expensive long-term leases and weakened finances with which to compete in the incredibly competitive UK supermarket sector. This type of arrangement contributed to the downfall of UK department store Debenhams.
Morrisons’ shareholders will now be asked to approve the leading bid, so look out for more news on that before the takeover proceeds to close, at which point Morrisons will cease to be a public company. This is proving to be one of the most-discussed takeovers on the London Stock Exchange this year, and one we will continue to watch with interest.
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