Wm Morrison/Fortress: weight of funds gives buyout groups impetus
Private equity firms are sitting on mountains of ‘dry powder’ that they need to deploy
Over to you, Clayton, Dubilier & Rice. The US private equity firm has been granted extra time to submit a formal bid for Wm Morrison, the UK supermarket chain already in receipt of a near-£10bn offer from fellow buyout specialists Fortress.
The tussle shows not only that UK assets are cheap but also that the weight of funds has reduced private equity groups to scrapping over them. Private equity is sitting on mountains of “dry powder” — $413bn in Europe alone, reckons Preqin — which they need to deploy. The buyout industry can never quite buck the cycle.
Having taken the bidding war for the UK’s largest supermarket public back in June, CD&R showed its hand early via an informal approach. Fortress has upped the ante pre-emptively, with its latest formal bid representing a near-50 per cent premium to the share price before takeover chatter began. Investors see room to go higher still.
It will be galling for warring US private equity firms to go head-to-head. Even more so if there is an auction of the kind already deciding the fate of inhalers group Vectura. These spawn no bargains.
Trade buyers are mostly absent from supermarket aisles, particularly in the UK, because of competition issues. Recall how J Sainsbury’s £7bn bid for Asda was kiboshed by antitrust regulators in 2019.
CD&R, which counts former Tesco boss Sir Terry Leahy as an adviser, will need to find new sources of value to make a bigger price tag work. Morrisons is tightly run. Returns would flow largely from financial engineering: sale and leaseback of properties, disposals including petrol stations, and from increasing debt and cutting costs.
Fortress’s revised bid is equivalent to an enterprise value of 9.1 times next year’s estimated ebitda on UBS numbers. That is a fifth higher than CD&R’s opening shot and a whisker ahead of levels last seen in early 2016.
There is an irony here. It may take the pressure of another wave on unspent capital for Morrisons to command a decent exit multiple in a few years’ time.