Property portfolio and deal with Amazon makes Wm Morrison attractive to circling private equity suitors, but would shareholders be better served if it stayed independent?
What has a good comedian and successful investor got in common? Answer; good timing. But I wonder whether the idea that the best interests of shareholders in Wm Morrison lies in its sale to private equity is a joke, a poor one at that.
Three private equity companies are circulating: Apollo Global Management, Clayton, Dubilier & Rice and a consortium led by Fortress, which SoftBank backs. Wm Morrison has accepted the Fortress bid, which is worth £6.3bn. That bid represents a near 50 per cent premium on the share price from early June, before news broke of interest from private equity.
What makes Wm Morrison (LON: MRW) so attractive to the P/E boys and girls? There are three motivations:
The first motivation is not specific to Wm Morrison but brings encouragement to UK investors. There is a growing sense that the UK economic recovery from Covid is being under-priced by the markets. The UK stock markets performed poorly compared to US markets during the first and second waves of Covid, and maybe they are due to see a catch-up. If that logic is correct, then the implications of the potential Morrison sale stretch beyond this particular company, applying to multiple British companies, many of whom may fall within private equity’s spotlight.
The second motivation lies with Morrison’s property portfolio. It owns around 85 per cent of its 500 or so stores, which creates the prospect of leasebacks. The temptation for private equity, and many fear it is a temptation they will be unable to resist, is to fund the purchase of Morrison by selling off its property. Critics say that such a move would yield short-term benefits but strip away from Morrison one of the underlying pillars that made it the company it is today.
The third motivation lies with Amazon and the way Morrison owns 50 per cent of its supply chain. The company has always emphasized vertical integration, and its supply chain makes it attractive to Amazon. Wm Morrison first tied up with Amazon in 2016, with the deal extended in 2019. For Amazon, the deal represented its first foray beyond hard goods in the UK. Today, 10 per cent of Morrison’s revenue comes via Amazon.
In some ways, this all seems back to the front. If Covid has heralded a change in business priorities, with greater emphasis on ESG and sustainability in particular, then Wm Morrison should be in vogue. One wonders whether private equity will have the same priority.
Lesson of Astra Zeneca
And for some observers, this whole saga has created a sense of deja vu — remember how Pfizer tried to buy AstraZeneca in 2014, with lots of promises about its good intentions. The UK company resisted, and seven years on, its market cap has doubled. Or you can go back further to when Philip Green made a bid for Marks & Spencer in 2004. Shares in Marks & Spencer have hardly performed well since then, but Philip Green’s companies performed even worse.
But then they were hostile bids; Wm Morrison’s management is on side with the private equity companies.
The end of a tradition?
Maybe the company’s late boss, Ken Morrison, is turning in his grave.
There is this sense that Wm Morrison has gone through some difficult times. Indeed you can trace the difficulties way back to when it bought Safeway, and the no-nonsense approach of Ken Morrison came unstuck when the business tried to conquer the south. But today, just as the approach that pretty much defines the retailer appears to be the type of approach that seems to fit the psychology of the fast-approaching post-Covid world, shareholders and senior management throw a wobbly and try to bailout.
The unspoken fear
But there is a fear, a nagging doubt which I am almost scared to speak out loud. If the deal with Amazon is so important, and indeed if Amazon is a potential owner of the company in the future as some suggest — maybe Fortress et al. are betting on this — there could be another opportunity. Morrison could eventually sell all of its property portfolio and become exclusively online, leveraging off its supply chain, unencumbered by the chains of its retail operations.
A move in that direction would be massively controversial, and maybe Wm Morrison would be too afraid to try it, embedded as it is in the legacy of Ken Morrison. A private equity owner, by contrast, might dare. The timing isn’t right, but it might be in a couple of years, and maybe this is the real opportunity.
Update October 2021
Morrisons has officially ceased trading as a publicly listed company after more than 50 years on the London Stock Exchange, with the majority of its board stepping down.