Morrisons' epic saga could use a short circuit - Reuters

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Shopping trolleys are parked at a Morrisons supermarket in south London, Britain August 19, 2016. Picture taken August 19, 2016.

LONDON, Aug 20 (Reuters Breakingviews) - The sprint for Wm Morrison Supermarkets (MRW.L) just became even more like a marathon. Just ahead of its bidding deadline, buyout group Clayton, Dubilier & Rice lobbed in a 9.7 billion pound offer for the UK grocer, including debt, prompting its target to switch its support from rival bidder, a consortium led by Fortress Investment. All concerned might appreciate a way to short-circuit the process.

As things stand, a shareholder vote on CD&R’s 285 pence-a-share bid won’t happen until October. If Fortress opts to return with an even higher offer, as Morrisons’ 292 pence share price on Friday morning seems to suggest, the process could drag on even further, especially as CD&R might counter-bid again.

Handily, the UK’s Takeover Panel has an alternative to this sort of bid-a-thon, which might seem good for shareholders but is bad for businesses as managers spend months obsessing over M&A instead of running their companies. Calling on bidders to participate in an auction, as recently happened with Carlyle (CG.O) and Philip Morris International’s (PM.N) pursuit of Vectura (VEC.L), can break the cycle.

The panel can probably force the issue towards the end of September if both sides remain at loggerheads. Morrisons’ board could call for such a circuit-breaker sooner. While that might seem against its price-maximising interests, it could still be a good idea.

CD&R’s offer mirrors Fortress’s comforting pledges on employee rights and refraining from flogging Morrisons’ property empire. But these promises aren’t legally binding, and CD&R may need to pull some levers to improve its returns. If the grocer’s revenue grows 3% annually and its EBITDA margin remains steady at just over 6%, EBITDA would be 1.3 billion pounds after five years. Assuming the same 9 times multiple, its enterprise value might be 11.3 billion pounds. If the bidders use 30% of the company’s operating cash flow to pay down debt, the internal rate of return would still lag 15% – below the 20% buyout firms aim for.

CD&R may be able to juice its returns by using an undivulged amount of preference shares. It might also grow Morrisons’ top line by parachuting ex-Tesco (TSCO.L) boss Terry Leahy in as chairman. But further bidding will naturally lower returns and increase the chances of buyer regret. There’s an argument for putting everyone out of their misery.

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CONTEXT NEWS

- Clayton, Dubilier & Rice said on Aug. 19 it had offered 285 pence per share in cash to acquire Wm Morrison Supermarkets, beating a 272 pence offer submitted on Aug. 6 by a consortium led by Fortress Investment.

- CD&R’s offer, which was recommended by the Morrisons board, values the UK supermarket chain’s equity at 7 billion pounds, and the entire enterprise, including net debt, at 9.7 billion pounds.

- In a subsequent statement on Aug. 19, Fortress said it was “considering its options” and urged Morrisons shareholders to take no action.

- Morrisons shares were trading up 4.6% at 292 pence as of 0723 GMT on Aug. 20.

Editing by Ed Cropley and Karen Kwok

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.

Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and at www.breakingviews.com. All opinions expressed are those of the authors.

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