Is Wm. Morrison Supermarkets plc Still A Potential Takeover Target?

After recent declines both Wm. Morrison Supermarkets plc (LON: MRW) and J Sainsbury plc (LON: SBRY) could become takeover targets.

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After Wm. Morrison Supermarkets’ (LSE: MRW) (NASDAQOTH: MRWSY.US) series of recent profit warnings, there has been lots of talk in the City that the company could be a potential takeover target.

The question is, how likely is it that a deal will go ahead and is the company’s recent profit slump going to put potential bidders off?

Lots of chatter

morrisonsAccording to some reports from the City, bankers and sponsors have been in talks for months now to see they can put together a financing package for a takeover of Morrisons. According to City sources, Morrisons’ founding family — which still owns approximately 10% of the company — wants out, as competition within the industry becomes increasingly more aggressive.

This wouldn’t be the first time Morrisons has been linked with a takeover approach; private equity firm CVC studied a potential bid back during 2007. And it would appear that right now would be the perfect time for private equity to pounce, as low interest rates have left buyout companies with huge piles of cash.

sainsbury'sFurther, it’s not just Morrisons that could become a takeover target. Peer J Sainsbury (LSE: SBRY) (NASDAQOTH: JSAIY.US) also looks attractive thanks to the recent slide in the company’s share price. The Qatar investment fund, which already owns a 26% stake, is considered to be Sainsbury’s most likely suitor.  

Buying 50p for a pound

Of course, private equity companies like to make money and they’re only interested in deals with plenty of upside potential. Luckily, though, at current prices any buyout company would be able to make a quick buck from the purchase of Morrisons.  

You see, recently declines have left Morrisons trading at a market capitalisation at is around the same as its shareholder equity, or the total value of the company’s assets after deducting liabilities. This by itself is not that attractive, however, Morrisons owns many of its own superstores, farms and even abattoirs, the total value of this property is in the region of £9bn, £4bn more than the company’s current value. Overall, what this means is that any buyer could purchase Morrisons, break the company apart and sell off the property for a quick multi-billion pound profit — not bad.

Sainsbury’s is also in the same position. Sainsbury’s property is worth around £10bn and the company’s current market capitalisation is £6bn.

Things could be about to get nasty

However, things could be about to get messy within the UK’s grocery sector as Tesco, Sainsbury’s and Morrisons are all about to embark on a price war. In particular, Morrisons is spending £1bn to lower prices throughout  its stores, following a similar move by Tesco a year ago. Tesco has also recently embarked on another price war, spending £400m to lure customers through its doors.

On the other hand, Sainsbury’s has not committed itself to any specific amount of spending to lower prices but chief executive, Justin King has stated that: “We have been competing hard with them[sector peers], and we will continue to [do so]”.

Unfortunately, it is likely that a price war will put buyout firms off any kind of deal as profit margins will come under pressure. 

Foolish summary

At present prices, Morrisons looks attractive as a takeover target, however, the impending price war may put potential interested companies off the idea. Still, the company’s property portfolio is where the value is and the opportunity to make a multi-billion pound profit may be too hard to pass up for some. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert owns shares in Morrisons and Tesco. The Motley Fool has recommended shares in Morrisons and owns shares in Tesco.

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