Morrisons agrees to $8.7bn PE takeover

September 2021 | DEALFRONT | PRIVATE EQUITY & VENTURE CAPITAL

Financier Worldwide Magazine

September 2021 Issue

WM Morrisons Supermarkets plc, the UK’s fourth largest supermarket chain, has agreed to a takeover led by Softbank owned Fortress Investment Group. The deal, which is worth $8.7bn, is subject to shareholder approval, but the supermarket group’s board of directors has recommended that the offer be accepted.

According to Morrisons, the Fortress bid represents an enterprise value multiple of approximately 8.3 times the company’s underlying earnings before interest, taxes, depreciation and amortisation (EBITDA) for the 52 weeks ended 31 January 2021, approximately 8.6 times its underlying pre-COVID-19 EBITDA for the 52 weeks ended 2 February 2020, and a multiple of approximately 18.5 times its underlying earnings per share for the 52 weeks ended 31 January 2021.

Fortress’ offer is backed by Canada Pension Plan Investment Board and Koch Real Estate Investments and a term loan and revolving credit facilities to be provided by Royal Bank of Canada and HSBC as mandated lead arrangers and RBC as facility agent. The offer exceeds the £5.52bn proposal from US firm Clayton, Dubilier & Rice (CD&R) which Morrisons had rejected as it “significantly undervalued Morrisons and its future prospects”, the company noted in a statement.

Under the terms of the Fortress deal, Morrisons shareholders will receive 254p per share held, comprising 252p in cash and a 2p cash dividend. The offer represents a premium of 42 percent to its closing share price of 178p on 18 June – the last business day before CD&R’s proposal. Morrisons said it had received an initial unsolicited proposal from Fortress on 4 May at 220p a share which was not made public. CD&R also had a 230p per share offer rejected by Morrisons, but according to the UK’s takeover code it has until 17 July to make a new offer or pull out of the race.

“We have looked very carefully at Fortress’ approach, their plans for the business and their overall suitability as an owner of a unique British food-maker and shopkeeper with over 110,000 colleagues and an important role in British food production and farming,” said Andrew Higginson, chairman of Morrisons.

“We believe in making long-term investments focused on providing strong management teams with the necessary flexibility and support to execute their strategy in a sustainable and value enhancing manner,” said Joshua A. Pack, managing partner at Fortress. “We fully recognise Morrisons’ rich history and the very important role Morrisons plays for colleagues, customers, members of the Morrisons Pension Schemes, local communities, partner suppliers and farmers. We are committed to being good stewards of Morrisons to best serve its stakeholder groups, and the wider British public, for the long term.”

If approved, the bid led by Fortress would be the biggest private equity deal for a UK business since the £11bn takeover of Boots in 2007. Fortress is a global investment manager with about $53bn in assets under management as of March.

However, a number of parties have voiced concerns about the potential sale of Morrisons. Legal & General Investment Management, the group’s eighth-largest shareholder with a 2.8 percent stake, has warned that Morrisons could end up in private equity hands for the “wrong reasons”. “If an acquirer makes strong returns this should come from making the company a better business,” said Andrew Koch, a senior fund manager at Legal & General. “It should not come from buying its property portfolio too cheaply or levering the company up with debt.”

The union Usdaw has also expressed concern about the deal and said it was seeking “urgent” meetings with management and the potential new owners to ensure that its “members’ interests and the long term future of the business are protected throughout this process”.

A third private equity firm – Apollo Global Management – has also confirmed its potential interest in Morrisons. According to a statement released by the firm, Apollo noted that it is, on behalf of certain investment funds managed by it, in the preliminary stages of evaluating a possible offer for the supermarket chain which operates 500 stores and employs about 118,000 staff in the UK.

Richard Summerfield