Price and Politics Set Stage for Three-Way Morrison Bidding War

A trio of the world’s largest private equity investors are vying for a once-unloved grocer from Bradford in the north of England -- setting the scene for a second three-way takeover fight in the U.K.’s supermarket sector in less than a year.

Ultimately, the battle for Wm Morrison Supermarkets Plc could be won on three fronts: price, property and politics.

Here’s how the contenders stack up:

Fortress Investment Group

So far, Fortress Investment Group is in pole position. A consortium led by the SoftBank Group Corp. subsidiary has won over bosses of the country’s fourth-largest supermarket with a 6.3 billion-pound ($8.7 billion) bid and pledges over pay, pensions and suppliers.

It also moved quickly to assure the U.K. government of its credentials as a “responsible owner,” highlighting the potential role politicians could play in sanctioning a deal amid concerns over worker protections and food supply.

“We are acutely aware of the wider responsibilities that come with ownership of a business with Morrisons’ history, culture and importance to the British public,” Fortress Managing Partner Joshua Pack wrote to U.K. Business Secretary Kwasi Kwarteng in a letter seen by Bloomberg News.

In its letter, Fortress made certain assurances not to sell the Morrison family silver: almost 500 stores, as well as manufacturing sites, some 85% of which it owns freehold. This could be key in winning over investors and politicians.

Legal & General Investment Management, a top 10 Morrison shareholder, asked Monday for more information on the value of the real estate so investors can decide whether bidders are angling to buy the company on the cheap. The property portfolio was last valued at about 6 billion pounds.

Others in the Fortress consortium include the Canada Pension Plan Investment Board and the real-estate arm of Koch Industries Inc., the largest closely held company in the U.S., run by the Koch family of prominent conservative political donors.

Clayton Dubilier & Rice

The Fortress proposal came in above an earlier 5.5 billion-pound offer from U.S. private equity house Clayton Dubilier & Rice, rejected by Morrison as being too low. CD&R was in the midst of talks with financing banks as it mulled a higher bid when it was caught off guard by the Fortress announcement, according to people familiar with the matter.

It continues to consider its next steps and there’s a sense at the private equity investor that even though Fortress currently has the backing of the Morrison board, a higher bid could ultimately win the day, the people said, asking not to be identified discussing confidential information.

It’s already received an indication from another top Morrison investor, J O Hambro Capital Management Ltd., that a new proposal in the 270 pence-per-share range would be worth serious consideration; Fortress has offered 252 pence in cash and a 2 pence special dividend per share.

CD&R is no stranger to U.K. retail and works closely with senior adviser Terry Leahy, the former chief executive officer of Tesco Plc. Most of Morrison’s top management team is made up of former Tesco employees who worked with Leahy when he was aggressively expanding into Asia and the U.S. Analysts have said it’s unlikely that CD&R, armed with this intimate sector knowledge, will not return to the fold.

A representative for CD&R declined to comment.

Apollo Global Management

Fortress could face further competition from Apollo Global Management Inc., which informed the market Monday that it had also been looking at Morrison. The firm said it has made no approach and it’s in preliminary stages of considering one.

The New York-based alternatives investor has already done some recent homework on the sector, having been one of the bidders for Asda Group Ltd., Britain’s third-largest grocer, in 2020. Asda, which also drew interest from Lone Star Funds, was eventually taken over by TDR Capital and the Issa brothers in a 6.5 billion-pound deal.

A potential setback for Apollo this time around could be the absence of Fabrice Nottin. He was a partner who helped lead Apollo’s discussions around a possible Asda deal, only to leave soon after, according to people familiar with the matter.

A representative for Apollo didn’t immediately provide comment.

Silent Suitors

U.K. supermarkets are well and truly in the crosshairs of private equity, with firms drawn to the sector by cheap public valuations, sizable real estate portfolios and reliable and significant cash flows. More recently, grocers have seen a surge in store and online sales as the pandemic changes consumer spending habits -- possibly for good.

As a result, the market isn’t ruling out more firms coming forward with bids for Morrison.

“With Fortress offering 254p a share and no sale and leasebacks, others might be stacking up the numbers to come back with a higher price that will include property disposals,” said Tony Shiret, a retail analyst at Panmure Gordon & Co., said in a phone interview.

“Private equity offers are strange beasts as they often don’t have to start paying commitment fees on financing until there’s a firm offer, so there is plenty of time for a lot of messing about before everything gets finalized,” he said.

Questions also remain about the intentions of Inc., which stunned the global grocery sector in 2017 when it bought Whole Foods Market Inc. Amazon and Morrison already have a close relationship: Morrison supplies the U.S. giant’s cashier-less grocery shops in the U.K. and sells food to its Prime members. Controlling the supermarket would give Amazon a national store network and food production capabilities, enabling it to finally crack the grocery business in Britain.

This year, Amazon opened its first “just walk out” store in west London, where shoppers can pick up goods and leave without having to use a checkout point. Many of the items in the store are supplied by Morrison, which unlike rivals has a large wholesale manufacturing arm and makes much of the food it sells.

Reaction So Far

In the past, private equity has garnered a bad reputation in the U.K. for raking in cash by selling off valuable assets while leaving companies lumbered with ever-increasing rent bills. But the political reaction to a potential buyout of one of Britain’s four key grocers has been muted so far.

Kwarteng is engaged with and monitoring the situation, according to his office, while Prime Minister Boris Johnson has stayed clear by stating any change of control at Morrison is a “commercial matter.”

The opposition Labour Party has demanded close scrutiny of the potential foreign private equity acquisition of a 122-year-old chain highly concentrated around northern England. Morrison’s main union, Unite, has demanded guarantees on jobs and working conditions in any takeover. Morrison has some 113,000 employees.

©2021 Bloomberg L.P.

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