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Will a bidding war heat up Morrisons’ share price?

Morrisons’ [MRW.L] share price skyrocketed after agreeing to sell up to private equity firm Fortress Investment. Now rival bids have started to circle, pushing the stock up even further.

Morrisons’ share price closed up shop for the weekend at 178.45p on 18 June. By the time trading had reopened on Monday, the stock was trading hands for 228.1p, a 27.8% jump as a bidding war broke out among private equity firms for the supermarket.

Finally, Morrisons’ head was turned by a £9.5bn bid from an investment group led by

Fortress Investment on 4 July. Under the terms of the deal, Fortress and its partners will pay 252p a share along with a special 2p dividend, valuing the grocer at £6.3bn.


Will Morrisons’ share price hit £3 as bidding war heats up?

Morrisons’ share price has now topped Fortress’s offer, gaining 10.5% last week. Now there’s a sense that another private equity firm could be eyeing up a bid for the supermarket - Clayton, Dublier & Rice’s bid of 230p a share was rejected a few weeks ago, while Apollo is apparently in the “preliminary stages of evaluating a possible offer”, according to the Financial Times.

A top 30 shareholder in Morrisons told the FT that they “welcome a bidding war,” adding that “there seems to be value in there and we can see this going to £3..”

Fortress itself is positioning itself as a responsible buyer, promising not to sell off its stores and manufacturing sites, which may go some way to getting the deal over the line. What is up for grabs is a strong business that delivered £254m operating profit in 2020. Revenue came in at £17.6bn, with investors being rewarded with an 11.5p dividend.


Fortress' revenue in 2020


Not everyone is happy about the situation. LGIM - the UK’s largest asset manager and a top ten shareholder in Morrisons - has warned against private equity firms buying the supermarket for the wrong reasons, such as profiting from its property portfolio. In Morrisons’ annual report 2020, chief financial officer Michael Gleeson states that 87% of the supermarket’s sites are freehold - a substantial property holding that was last valued at around $6bn.

Seeing as Fortress has put a £6.3bn valuation on Morrisons’ entire business, LGIM is asking for more details on the value of Morrisons’ property to determine if equity firms are looking to pick up a bargain.

The Fortress deal has also drawn political attention with the UK business secretary Kwasi Kwarteng expected to discuss it with Morrisons’ chair Andrew Higginson. Mark Kelly at investment bank Cowen said in a note to investors that this was the ‘only risk worth any level of discussion,’ with the analyst adding that there was a ‘very low risk’ of the business secretary intervening, according to the Financial Times

“With Fortress offering 254p a share and no sale and leasebacks, others might be stacking up the numbers to come back with a higher price that will include property disposals” - Tony Shiret


Where next?

According to Bloomberg, Apollo might be considering making another bid for the grocer, while another big Morrisons investor, Jo Hambro Capital Management LTD, has indicated that any new proposal around 270p per share would be worth looking into.

“With Fortress offering 254p a share and no sale and leasebacks, others might be stacking up the numbers to come back with a higher price that will include property disposals,” Tony Shiret, a retail analyst at Panmure Gordon & Co., told Bloomberg.

Shiret added that as private equity firms don’t have to put down any cash before a firm offer is in place there was still ‘time for a lot of messing about’. How much messing about happens between now and when the deal is rubber-stamped is likely to drive Morrisons’ share price over the next couple of weeks.

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