Morrisons shares jumped more than 30% on Monday, after the supermarket giant rejected a £ 5.5bn takeover bid from a US private equity firm, potentially sparking a bidding war .
Investor demand was boosted by the announcement over the weekend that Morrisons, which employs around 120,000 people in the UK, had become a takeover target, making the Bradford-based chain the first riser in the industry. FTSE 250 Monday morning, the first opportunity to trade shares after the approach was made public.
Shares rose across the rest of the sector, with traders betting other supermarket groups could become targets for private equity. Sainsbury’s and Ocado were up 3.5% making them the top 100 FTSE stocks. Tesco shares were up 1.3% and Marks & Spencer up 3%.
However, Labor has raised concerns over the prospect of further private capital takeovers of UK companies, saying companies tend to dive and pocket dividends, while cutting jobs and leaving over-indebted companies. Reports suggest the Morrisons board would seek assurance from any potential buyers that their workers, manufacturing operations and pension plan would be protected.
Morrisons said on Saturday it rejected a preliminary offer from US buyout firm Clayton, Dubilier & Rice because it “significantly undervalues Morrisons and its future prospects.” CD&R had offered to pay 230p a share in cash. Morrisons’ share price closed at 178.45 pence on Friday, but rose to 235 pence on Monday morning, valuing the company at £ 5.7 billion.
The private equity firm has until mid-July to make another offer or back out, which means it could file a more lucrative bid to convince Morrisons bosses to recommend investors sell the business . CD&R has Sir Terry Leahy, the former CEO of Tesco, as its senior advisor.
Analysts are speculating that other bidders, including rival private equity firms or the big retailer Amazon, could put their hats in the ring and start a bidding war for the UK’s fourth-largest grocer.
Michael Hewson, chief market analyst at CMC Markets UK, said Morrisons’ surprise offer would give the entire industry a boost. Supermarket stock prices have struggled despite the success of companies throughout the pandemic.
“Compared to companies like the US food distribution industry, the industry’s share price performance has been dismal despite its profitability and dividend yields of around 4%. Maybe that is about to change, ”he said.
Analysts said bidders were interested in Morrisons in part because of the size of its online shopping and grocery delivery arm, which saw a 113% increase in online sales in the first quarter. “It is being supported because, despite this expansion, its online business is smaller than that of its competitors, which leaves more room for exceptional growth,” said Susannah Streeter, senior analyst at investments and markets at Hargreaves Lansdown.
Morrisons also owns most of its stores, which means a new owner could save money by selling or renting the sites, Streeter added. The grocer is full owner of 85% of its 497 stores and is proud of its 19 manufacturing sites, including bakeries, slaughterhouses, fishing fleets and egg farms.
However, Streeter warned that the appetite for supermarket buyouts could be short-lived as foreclosure-weary shoppers opt for restaurant meals and demand for groceries begins to wane. “As buyers fill fewer baskets, there is likely to be new price competition that could eat into margins at a time when continued investment is needed to expand online capacity,” he said. she declared. “So the current supermarket sweep could turn into a disappointing rollercoaster battle as grocers battle for market share. ”