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* Morrisons rejected proposed 5.52 bln pound CD&R offer
* Morrisons said proposal 'significantly undervalued' it
* CD&R has until July 17 to make firm offer or walk
* Former Tesco boss Leahy is senior adviser to CD&R
* Tesco, Sainsbury's, M&S rise on hopes sector in play
(Adds comment from top 10 Morrisons shareholder, updates
shares)
By James Davey
LONDON, June 21 (Reuters) - Morrisons shares surged
as much as 35% on Monday on hopes that U.S. private equity firm
Clayton, Dubilier & Rice (CD&R) might raise its proposed offer
for the British supermarket group or flush out other bidders.
Britain's fourth-largest grocer by sales behind Tesco
, Sainsbury's and Asda, said on Saturday that
it had rejected a proposed 5.52 billion pounds ($7.62 billion)
cash offer from CD&R.
The surprise approach underlines private equity's growing
appetite for supermarkets in Britain, attracted by their steady
cash generation and freehold real estate assets.
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.
It said CD&R's 230 pence per share offer, which including
net debt of 3.17 billion pounds gives Morrisons an enterprise
value of 8.7 billion pounds, "significantly undervalued" the
group and its prospects.
Shares in Morrisons closed up 61.8 pence at 235 pence in the
first day of trading after the offer, which was made at a 29%
premium to Friday's closing price, became publicly known.
"The sector generally looks undervalued, and private equity
look to be interested in Morrisons partly because it has a lot
of freehold property which they would ‘sale and leaseback’ to
generate cash to pay back to themselves," Andrew Koch, senior
fund manager, active equities at Legal & General Investment
Management (LGIM), said of the move.
"That’s not adding any genuine value, and the company could
do that themselves. So I would personally not expect a bid to
succeed at that level," added Koch at LGIM, which Refinitiv data
shows as having a 1.58% stake in Morrisons.
Analysts said they expected CD&R to assess investor reaction
before deciding its next move.
Under British takeover rules CD&R, which has former Tesco
boss Terry Leahy as a senior adviser, has until July 17 to
announce a firm offer or walk away.
Shares in rivals Tesco, Sainsbury's and Marks & Spencer
rose as much as 3.2%, 5.7% and 4.1% respectively on
hopes the whole sector was now in play, analysts said, adding
that some short sellers were also closing out positions.
Silchester and Columbia Threadneedle, Morrisons' two largest
investors, which Refinitiv data showed having stakes of 15% and
7.4% respectively, both declined to comment.
In addition to the possibility of other private equity
players entering the fray, there has long been speculation that
U.S. giant Amazon, which has a partnership agreement
with Morrisons, could emerge as a possible bidder.
Amazon declined to comment.
With a staff of 118,000, Morrisons is one of the UK's
biggest private sector employers and Britain's opposition Labour
Party warned on Sunday that a private equity acquisition could
put jobs at risk.
A spokesperson for Prime Minister Boris Johnson declined to
comment on the situation, while shopworkers union Usdaw, which
represents Morrisons staff, also had no comment.
SUPERMARKET SWEEP
Industry executives and some sector analysts believe the
stock market has failed to recognise the inherent value in
Britain's listed supermarket groups.
They argue that if equity markets do not value them
appropriately, acquirers will.
"Investors want a very binary story about knuckling down,
keeping capex to a minimum and just becoming a cash machine,"
one senior supermarket executive told Reuters.
The executive said it was possible that even Tesco, with an
equity market value of 17.3 billion pounds, could receive an
approach.
Zuber and Mohsin Issa joined forces with private equity firm
TDR Capital to buy a majority stake in Asda from Walmart
in a deal valuing the group at 6.8 billion pounds.
That deal completed in February and followed the competition
regulator's blocking of Sainsbury's takeover of Asda in 2019.
In April, Czech billionaire Daniel Kretinsky raised his
stake in Sainsbury's to almost 10%, igniting bid speculation.
($1 = 0.7243 pounds)
(Reporting by James Davey
Additional reporting by Simon Jessop, Thyagaraju Adinarayan and
Elizabeth Piper; Editing by David Goodman, David Evans and
Alexander Smith)
