Under Fire Over Pay, Morrison Chiefs May Get Buyout Windfall

Bosses of Wm Morrison Supermarkets Plc, facing investor pressure over pay as leaders of a public company, could potentially land a nine-figure windfall should the U.K. supermarket operator agree to be taken private.

The grocer has rejected a 5.5 billion-pound ($7.6 billion) proposal from buyout firm Clayton Dubilier & Rice, setting the scene for a heated takeover battle. A successful bid could see Morrison management share an estimated payout equal to about 5% of the company’s market value based on typical structures for large buyouts, according to people familiar with industry norms.

In Morrison’s case, that could equate to roughly 290 million pounds for company leaders including Chief Executive Officer Dave Potts, based on its current market value of 5.8 billion pounds. Shares in the group surged as much as 35% on Monday. Precise details of CD&R’s compensation plans couldn’t immediately be learned, and it’s possible they could deviate from standard practices.

Under Fire Over Pay, Morrison Chiefs May Get Buyout Windfall

Most of Morrison’s top management team are ex-employees of Tesco Plc and worked with its former CEO Terry Leahy when he was aggressively expanding into the U.S. and Asia. Leahy is now a senior adviser to CD&R and closely involved with the Morrison bid.

Potts spent most of his working life at Tesco, leaving after he failed to get the top job when Leahy resigned. Other alumni of Britain’s largest supermarket chain now at Morrison include Chairman Andrew Higginson, Chief Operating Officer Trevor Strain and Chief Financial Officer Michael Gleeson.

A large portion of any compensation package received from a private equity buyer would likely be in the form of stock grants, meaning gains would only be realized in an exit several years later. Representatives for CD&R and Morrison declined to comment.

For Morrison’s management, any private equity payday would follow one of the largest-ever investor revolts over executive pay at a U.K.-listed company. More than 70% of Morrison shareholders voted against the grocer’s latest directors’ pay report earlier this month. The dispute arose after Morrison’s remuneration committee adjusted the criteria for bonuses even though profits had halved during a year, with the grocer having absorbed 290 million pounds of Covid-related costs.

The non-binding vote means the executives will still receive their rewards, which include a 1.7 million-pound bonus for Potts, and Morrison has said it will “re-engage” with shareholders to explain its decision. It’s not the first time Morrison investors have voted in high numbers against executive pay at the company.

No-Brainer

“U.K. executives are fairly dissatisfied with how they are treated in public companies, compared to how it would be in the U.S. or under private equity ownership,” said Nigel Rudd, chairman of jet base operator Signature Aviation, which was sold to private equity this year.

That, combined with the amount of cheap money available to buyout firms, makes take-private bids a “no-brainer,” Rudd said.

Private equity firms have spent $46 billion on deals involving U.K. targets this year, according to Bloomberg data. That puts them on course for one of their busiest years on record as they deploy their record amounts of unspent capital to take advantage of company valuations battered by the pandemic.

CD&R is still interested in a deal for Morrison and considering its next move after the initial rejection, according to people familiar with the matter. Under U.K. takeover rules, it has 28 days to make a firm offer for Morrison or walk away.

The price that CD&R initially offered is too low, one big Morrison shareholder said.

“The sector generally looks undervalued, and private equity look to be interested in Morrisons partly because it has a lot of freehold property which they would ‘sale and leaseback’ to generate cash to pay back to themselves,” said Andrew Koch, senior fund manager for active equities at Legal & General Investment Management. “That’s not adding any genuine value, and the company could do that themselves. So I would personally not expect a bid to succeed at that level.”

CD&R is no stranger to the U.K. retail sector, having owned brands including discounter B&M European Value Retail SA. While several merger situations in the U.K. have seen counterbids, other buyout firms may find it hard to compete with the close executive ties CD&R has with Morrison’s management team -- though such links aren’t uncommon. A final decision on whether to sell to CD&R, or any other bidder, will be a full board decision at Morrison.

Amazon.com Inc. is viewed as a potential strategic bidder for Morrison, people familiar with the matter said. The e-commerce group already has a trading partnership in place with Morrison, though it’s unclear if it’ll make an approach, the people said.

A representative for Amazon didn’t immediately provide comment.

©2021 Bloomberg L.P.

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