Sports fans watching the Olympics this week may have been introduced to Kata — the Japanese martial art of self-defence against an imaginary opponent. In a similar spirit the Fortress-led consortium vying for control of Wm Morrison took a similar swipe yesterday at a rival yet to formally appear.
As the clock ticked down towards a deadline on Monday for Clayton Dubilier & Rice, the American buyout firm, to return with a competing bid for the supermarket group, the City was taken by surprise by unexpected action.
Fearing that its recommended 254p-a-share bid had failed to entice Morrisons’ investors, Fortress decided it wasn’t pulling any punches and took the unusual step of making a higher offer even though Clayton Dubilier & Rice had yet to show its hand.
City sources said that it was extremely rare for bidders to bid against themselves in public mergers and acquisitions. However, the pre-emptive strike by Fortress yesterday was designed to win over shareholders and make it even more difficult for Clayton Dubilier & Rice to clinch a deal. One industry banker quipped that it was similar to spotting an attacker on the horizon: “Do you just sit back and let them abuse you or do you make the first strike?”
It is thought that CD&R had been putting the finishing touches to a financing package on Thursday morning amid hopes that it could have made an offer yesterday morning but the process was snarled up. The sweetened Fortress offer has left CD&R scrambling to clinch approval from its investment committee to back an even higher price and after markets closed on yesterday it emerged that it had asked Morrisons’ board to delay the shareholder vote to give it extra time. As a result of the vote being pushed back to August 27, CD&R is likely to have a deadline of August 20 to make its offer.
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The decision by Fortress to make a renewed public bid at 270p-a-share plus a 2p dividend was a deliberate move to appeal to investors as JO Hambro, one of Morrisons’ top ten investors, has publicly called for a bid approaching that level. It is thought that there was a quiet confidence in Morrisons’ boardroom that a higher price could be garnered even though it recommended the Fortress bid because of the competitive tension between two bidders.
As it happened, Clayton Dubilier & Rice has not even had to make a bid for Fortress to be chivvied into improving its offer.
A week earlier Fortress had secured further funding from GIC, Singapore’s wealth fund, giving it extra fire power should a bid battle break out. The question is how much higher can Clayton Dubilier & Rice and Fortress go? Fortress could secure extra funding from Apollo, the US fund that originally had expressed an interest in buying Morrisons itself, gave its allegiance to the consortium.
It is thought that some Morrisons investors have called for a takeout price closer to 300p but at 272p Fortress’s improved offer is the sixth price it has put to Morrisons’ directors after its initial approach in mid-May. It is a 52 per cent premium to the share price before news of a takeover leaked and 7 per cent higher than the deal that was recommended. Analysts believe Morrisons’ share price, which has flatlined at about 175p for five years, could not have hit such heights without takeover interest.
Clayton Dubilier & Rice is having to wrestle with whether it can afford to bump up its offer from its initial 230p-a-share interest by about a fifth and still generate a return. Supermarkets are historically low-margin businesses.
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William Wood, analyst at Bernstein, highlighted that it’s also about a 7.4 per cent premium to Morrisons’ earnings, a significantly higher multiple than that paid for Asda by the Issa family and TDR Capital. Wood said that Fortress’ higher price puts further pressure on a private equity suitor to sell assets to secure acceptable returns. With £1.5 billion of asset sales, including forecourts, distribution centres and manufacturing sites, those returns could increase from 2 per cent to 14 per cent.
Observers had accused the Morrisons’ board of rolling over at the first sniff of a deal but the unexpected new shot from Fortress has added drama that suggests the battle for Britain’s fourth largest grocer is far from over.
Fortress has attempted to soothe any political angst about a leveraged buyout of the supermarket and its supply chain by making assurances about jobs, the legacy of founder Sir Ken Morrison, pensions and committed to not pursuing material sale and leasebacks of stores. As a result, the government has shown little concern about a private –equity buyout.
Clayton Dubilier & Rice is thought to be comfortable with making similar commitments and it has been suggested that they have greater experience than Fortress of running British retail businesses and squeezing high returns because it owns B&M Bargains and has Sir Terry Leahy, former Tesco boss, as an operating partner. Fortress owns the smaller Majestic Wines in the UK.
