UPDATE 2-Morrisons leaps after $7.6 bln private equity offer rejected

* Morrisons rejected proposed 5.52 bln pound offer from CD&R

* Morrisons said proposal 'significantly undervalued' it

* CD&R has until July 17 to make firm offer or walk

* Tesco, Sainsbury's, M&S rise on hopes sector in play
(Adds detail, reaction, updates shares)

By James Davey

LONDON, June 21 (Reuters) - Shares in Morrisons surged by as
much as a third 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.

Morrisons, Britain's fourth-largest grocer by sales
behind market leader 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 approach underlines private equity's growing appetite
for supermarkets in Britain, attracted by their steady cash
generation and freehold real estate assets.

Morrisons said CD&R's offer of 230 pence per share, a 29%
premium to Friday's closing price, "significantly undervalued"
the group and its prospects. Including net debt of 3.17 billion
pounds, CD&R's offer price gives Morrisons an enterprise value
of 8.7 billion pounds.

Shares in Morrisons were up 56.7 pence to 235.2 pence at
1059 GMT, as some analysts said they expected CD&R to assess
investor reaction before deciding on 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 intention to make an 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 that the whole sector could be 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
online shopping giant Amazon, which has a partnership
agreement with Morrisons, could emerge as a possible bidder.

Morrisons, unique among British supermarket groups in making
over half of the fresh food it sells, trades from about 500
stores and has 118,000 staff, making it one of the country's
biggest private sector employers.

Britain's opposition Labour Party warned on Sunday that a
private equity acquisition of Morrisons could put jobs at risk.

Shopworkers union Usdaw, which represents Morrisons staff,
had no immediate comment.

SECTOR IN FOCUS

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.

Zuber and Mohsin Issa in February 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.

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

Shares in both Morrisons and Tesco closed below their
pre-coronavirus pandemic levels on Friday.

While sales have soared at all British supermarket groups
during the coronavirus crisis, their profits have fallen sharply
because of the huge extra costs incurred.
($1 = 0.7243 pounds)

(Reporting by James Davey
Additional reporting by Simon Jessop and Thyagaraju Adinarayan;
Editing by David Goodman and Alexander Smith)