It’s no secret that Wm. Morrison Supermarkets (LSE: MRW) (NASDAQOTH: MRWSY.US) is struggling. The UK’s number four food retailer has suffered from being a late entrant into the growth areas of convenience stores and online shopping, and has also been hurt more than its larger rivals by the rise of discounters Aldi and Lidl.
Falling sales, and a recent profit warning, as management cuts prices to compete, have seen Morrisons’ shares trading at a level not seen since 2006. At a current price of 192p, the company has a market capitalisation of £4.5bn — half the value of the property on its books. Meanwhile, Morrisons’ food manufacturing business — the group owns farms, abattoirs, processing plants and suchlike — has been valued as high as £3bn by industry analysts.
It’s all been a bit much for Sir Ken Morrison, who, by the time he retired in 2008, had built the company founded by his father into a formidable force. At Morrisons’ recent AGM, the outspoken octogenarian, who holds the honorary title of life president, laid into the Board, describing the pricing of key products, such as Jersey potatoes, as “ridiculous”, and management’s strategy as “bulls**t”.
Bid rumours
Back in February, Bloomberg reported that the Morrison family, which still owns about 9.5% of the company’s shares, had sounded out private equity firms on taking Morrisons private. Bloomberg named CVC Capital Partners (which had studied a potential bid back in 2007), Carlyle Group and Apax Partners.
Sir Ken said he knew nothing about any buyout talks, and added: “At my age I’m not thinking of returning”. Indeed, the family patriarch and private equity don’t seem obvious bedfellows. While unlocking the value of the property would be one of the attractions for private equity, Sir Ken always considered Morrisons’ freeholds as sacrosanct. However, the younger generation of the family may have different views.
Buyout rumours resurfaced in May. This is Money reported that a US-led private equity consortium was set to launch a £6.4bn or 275p a share cash offer. It was said that Morrisons’ leading US-based shareholders, who together own more than 15% of the supermarket group’s equity, had been bid for their shares.
While I can’t remember This is Money ever having the inside track on a takeover before, the mooted 275p offer represents a 43% upside from the current share price, and, as I said, Morrisons does have attractions.
Tax wheeze
And its not just private equity that may see potential. US retailers — like other US companies — are currently looking at making acquisitions in the UK and Europe, in part to enjoy the significant tax advantages of shifting their tax bases across the pond.
US drugstore chain Walgreen is reportedly looking at such a move by means of a full takeover of Alliance Boots in which it already has a 45% stake. There could be US retailers running the rule over Morrisons.
A happy bonus
A bid from a private equity group or a tax-conscious US retailer may or may not materialise. I think anyone investing in Morrisons today needs to be convinced that the UK supermarket isn’t fundamentally broken, and to be prepared for a patient wait for recovery, with the possibility of a bid putting a rocket under the shares for a quick profit being viewed as a happy bonus.
