Morrisons Losers Will Check UK Sainsbury’s
LONDON (Reuters Breakingviews) – UK buyers get used to settling for substitutes when supply chain issues make their first choice unavailable. SoftBank Group’s Fortress Investment, which led the losing consortium of grocery chain Wm Morrison Supermarkets, must do the same. He cannot regret the result.
Fortress made a 286 pence per share bid for the nation’s fourth-largest supermarket chain, just short of the winning 287 pence bid from Clayton, Dubilier & Rice which valued the company’s equity at $ 7 billion. books. It’s only 2 pence more than CD&R’s bid in August, which begs the question of whether Saturday’s auction was worth it.
The winning bid was about 60% more than Morrisons’ value before the start of the acquisition saga. Still, shareholders can still be disappointed: Morrisons stock closed at 297 pence on Friday. For his part, Fortress at least knows he hasn’t paid too much. And if he still thinks UK supermarkets are a recipe for decent returns, he has a fallback option. British billionaire Issa Brothers and private equity group TDR Capital bought Asda a year ago and, at a value of Â£ 19bn, market leader Tesco is likely on the wholesale side. This leaves the perennial J Sainsbury buyout target.
Unlike Morrisons, the Â£ 7 billion grocer does not produce some of its own food and has a smaller freehold portfolio of properties. But it has a bigger market share and a better online offering. And even with the same redemption premium, it could generate fair returns.
Assume Fortress improves Sainsbury’s EBITDA margin by one notch to 8%, manages to grow revenue by 2% per year and finances a third of its acquisition with equity, in line with CD&R’s Morrisons offering. In five years, after using one-third of generated EBITDA to repay debt, the internal rate of return would be 18%, according to Breakingviews calculations based on an EBITDA exit multiple of 8.7 times, the same as its entrance.
Luckily for Fortress, which manages $ 54 billion, Sainsbury’s share price fell from the peak of 342 pence reached in August when buyout speculation resumed. Sadly, losers from Asda Apollo Global Management and Lone Star might also be interested. Another UK supermarket auction could be around the corner.
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– US private equity group Clayton, Dubilier & Rice won an October 2 auction for Britain’s Wm Morrison Supermarkets with a Â£ 7 billion bid, narrowly beating an offer from a consortium led by Fortress Investment, owned by the SoftBank group.
– CD&R had offered 287 pence per share, barely 1 pence more than the Fortress consortium, the Takeover Panel, which governs mergers and acquisitions in Britain, said in a statement.
– CD&R’s offer was slightly higher than the 285 pence per share offer recommended by the Morrisons board in August.
(Edited by Ed Cropley and Oliver Taslic)
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