Private Equity Circling Morrison Will Have to Pay Up, Says M&G

(Bloomberg) --

A takeover auction for Wm Morrison Supermarkets Plc today should result in investors getting a fair price for the grocer at a time when cash-rich private equity companies are raiding U.K. Plc, according to shareholder M&G Plc. 

“We will not countenance companies being taken out at the wrong price,” said Rupert Krefting, head of corporate finance and stewardship at the asset manager, on a call with Bloomberg. He said the auction meant the battle to win Morrison is “now up in the realms of a much more sensible area where we would consider accepting it.”

Fortress Investment Group and Clayton Dubilier & Rice LLC, two of the world’s biggest names in private equity, will face off in an auction later today to determine who takes control of Morrison. CD&R’s 7 billion pound ($9.5 billion) offer is the highest on the table at the moment and the one-day bidding battle will determine the final price each firm is willing to pay. 

The tussle for Morrison began in June and has sparked heated debates among U.K. politicians, media and asset management experts over the merits of public versus private ownership, private equity’s reputation for asset stripping, and how to ascribe fair value to a grocer whose shares, before news of the takeover approach, were beaten down by Covid.

Krefting, an early critic of the Morrison board for recommending what he feels was a desultory 252 pence a share initial offer from Fortress, said pressure from investors had paid off during a period when depressed valuations for U.K. companies are spurring record takeover activity.

“We were most frustrated by our investee companies accepting offers that were too low a price,” he said. 

M&G was also a critic of CD&R’s take-private of UDG Healthcare Plc during the summer. Krefting said in early 2021 many U.K. companies were just starting to recover from the pandemic and Brexit, and private equity firms saw an opportunity as “share prices weren’t fully reflecting that recovery”.

Morrison, a household grocer whose late founder vowed should never be sold, saw it shares slide more than 15% during 2020. The first recommended offer from Fortress was pitched at a more than 40% premium to a recent three month volume-weighted average closing price level. The price though was still well below the firm’s average trading level in recent years and took no account of a promising turnaround plan, Krefting said. However, he acknowledged boards also have to consider at what point fiduciary obligations to shareholders mean they need to accept an offer and put it to a vote.

M&G is not the only shareholder that has raised concerns about Morrison’s being sold too cheaply. Silchester International Investors has also been vocal about wanting what they call a fair price for the grocer. 

“A rule of thumb when making a recommendation is the board don’t believe they can get the shares to that level in the next two years,” Krefting said. That time frame should be extended as two years just covers the next year’s budget plus a bit extra, he added.

Morrison declined to comment. 

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