Apollo enters takeover battle for Britain's Morrisons

[July 05, 2021]  By James Davey

LONDON (Reuters) - The $8.7 billion bid battle for Britain's Morrisons intensified on Monday when a third private equity group entered the fray, sending the supermarket group's share price racing ahead of the value of an offer it recommended on Saturday.

New York-headquartered Apollo Global Management, which last year missed out on buying Morrisons rival Asda, said it was in the preliminary stages of evaluating a possible offer but had not approached its board.

Private equity groups have embarked on a spending spree on assets around the world in the last six months, flush with cash after they largely sat out the pandemic. Morrisons, set up 122 years ago as a market stall in northern England, is a target.

Morrisons said on Saturday that its board, led by Chairman Andrew Higginson, had recommended a takeover led by SoftBank owned Fortress Investment Group that valued the grocer at 6.3 billion pounds ($8.7 billion).
 

The offer from Fortress, along with Canada Pension Plan Investment Board and Koch Real Estate Investments, exceeded a 5.52 billion pound unsolicited proposal from Clayton, Dubilier & Rice (CD&R), which Morrisons rejected on June 19.

However, it was less than the 6.5 billion pounds asked for by top 10 Morrisons investor JO Hambro last week.

Fortress' offer gives Morrisons an enterprise value of 9.5 billion pounds when including net debt of 3.2 billion pounds.

Its shares were up 11.2% at 267 pence at 0935 GMT - ahead of the 254 pence value of the Fortress deal, indicating investors expect higher offers to be made. Morrisons declined to comment on Apollo's statement.

Analysts have speculated that other private equity groups and Amazon, which has a longstanding supplier deal with Morrisons, could also bid. Amazon has declined to comment.

While Britain has always been a key destination in Europe for private equity investments, the volumes have peaked this year as Brexit and sterling weakness coupled with the coronavirus crisis to hit company valuations.

Like its peers Tesco, Sainsbury's and Asda, Morrisons enjoyed a surge in sales in the last 18 months, as hospitality was forced to shut, but the cost of ramping up online delivery hit profits.
 

Ultimately, its fate will be decided by its shareholders.

As things currently stand there is only one firm bid on the table and investors will vote on the Fortress deal.

Morrisons' three biggest investors Silchester, Blackrock and Columbia Threadneedle, which Refinitiv data showed having stakes of 15.2%, 9.6% and 9.4% respectively, are effectively the kingmakers. None has commented so far.

Under UK takeover rules Fortress' offer effectively resets the clock for CD&R to clarify its intentions, with a previous date of July 17 extended to around the end of the month.

A Morrisons store is pictured in St Albans, Britain, September 10, 2020. REUTERS/Peter Cziborra/File Photo

The Takeover Panel is yet to announce the deadline by which Apollo must clarify its intentions.

"254p now seems to be the likely minimum and we would not rule out the eventual price rising further," said analysts at Barclays.

APPETITE FOR GROCERS

Barclays said CD&R could pay more than the agreed offer from Fortress, pointing out that CD&R has a bigger UK retail footprint than Fortress as it owns the Motor Fuels Group petrol forecourt chain. Also CD&R might be able to bid more if sale and leasebacks of Morrisons stores form part of its plan.

Fortress has ruled out material sales and says it likes to empower existing management teams - an approach that could prove popular with the government after the pandemic showed the importance of retaining food production locally.

Morrisons owns 85% of its nearly 500 stores and has 19 mostly freehold manufacturing sites. It is unique among British supermarkets in making over half of the fresh food it sells.

After years of grappling with the German discount rivals Aldi and Lidl, British supermarkets are once again attractive because of their cash generation and freehold assets. The funds believe the stock market is not recognising the grocers' value in the wake of the COVID-19 pandemic.
 

Morrisons started out as an egg and butter merchant in 1899 and was built up over 55 years by the late Ken Morrison, the son of the founder.

Last year Apollo lost out on buying Asda to brothers Zuber and Mohsin Issa and TDR Capital. That deal valued Asda at 6.8 billion pounds.

Shares in Tesco and Sainsbury's were up 1.5% and 1.9% respectively with speculation swirling that they could also attract approaches. Both companies declined to comment.

In April, Czech billionaire Daniel Kretinsky raised his stake in Sainsbury's to almost 10%, igniting bid speculation.

Apollo says its private equity business had more than $89 billion in assets under management by the end of March 2021, in 150 companies such as Watches of Switzerland, TMT group Endemol Shine, bookmaker Ladbrokes Coral and Norwegian Cruise Line.

($1 = 0.7232 pounds)

(Reporting by James Davey; Editing by Kate Holton/Guy Faulconbridge/Kirsten Donovan/David Evans)

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