* Morrisons agreed CD&R's 7 bln stg offer last month
* Rival suitor Fortress considering options
* All parties talking to Takeover Panel regarding auction
* Morrisons shares trading above CD&R's offer
(Adds detail, shares)
By James Davey
LONDON, Sept 8 (Reuters) - The $10 billion takeover battle
for British supermarket group Morrisons between two U.S.
private equity groups looks set to be decided by a rarely used
auction process.
Morrisons said on Wednesday it was in talks with Clayton,
Dubilier & Rice (CD&R), Fortress Investment Group and Britain's
takeover regulator about an auction to settle its future.
Last month, Morrisons agreed a 7 billion pound ($9.6
billion) offer from CD&R, which has former Tesco boss
Terry Leahy as a senior adviser. However, the rival consortium
led by Softbank-owned Fortress could still trump that
bid.
The fight for Britain's fourth-largest grocer after Tesco,
Sainsbury's and Asda, is the most high-profile looming
takeover amid a raft of bids and counter bids, reflecting
private equity's appetite for UK Plc.
Morrisons said that as neither bidder had declared its offer
final, it was talking to both of them and the Takeover Panel,
which governs M&A deals in the UK, about "an orderly framework
for the resolution of this competitive situation" - which would
typically be an auction.
Morrisons said shareholder meetings to vote on the CD&R
offer would be convened for around the week starting Oct. 18.
It said any auction would take place prior to these
shareholder meetings, on a date announced by the Takeover Panel.
Following completion of an auction, Morrisons shareholders
would vote on either a Fortress or a CD&R offer, depending on
which offer Morrisons' board recommended.
Morrisons said it expected a scheme document on CD&R's offer
to be posted to shareholders around Sept. 25.
CD&R's latest offer is worth 285 pence per Morrisons share -
a 60% premium to Morrisons' share price before takeover interest
emerged in mid-June.
Fortress, whose last offer was pitched at 272 pence a share,
said on Wednesday it "continues to consider its options."
Morrisons shares were trading at 291.3 pence at 1044 GMT,
indicating investors are hoping for a higher bid.
CD&R had no further comment.
AUCTION PROCESS
The Takeover Panel's standard auction structure is bidding
over a five-day period. However, if all parties are in agreement
a different structure can be used - for example bidding over
just one day.
Last month, the Takeover Panel set up an auction of British
inhaler company Vectura for suitors Philip Morris
International and U.S. private equity firm Carlyle.
However, in the event Carlyle decided not to raise its offer.
Morrisons, which trades from 497 stores and has a staff of
over 110,000, reiterated on Wednesday that in addition to the
financial terms of any offer it places "very significant
emphasis on the wider responsibilities of ownership", including
the importance of employees, customers, pension trustees and
suppliers.
Last month, the trustees of Morrisons' pension schemes
warned a takeover by either CD&R or Fortress could "materially
weaken" the security of the schemes if no additional protection
was agreed.
Morrisons is due to publish first half results on Thursday.
($1 = 0.7266 pounds)
(Reporting by James Davey
Editing by Guy Faulconbridge, Mark Potter and Jane Merriman)
Tesco (TSCO)
Sainsbury's (SBRY)