The Morrisons (LSE:MRW) share price soared after it rejected a takeover approach from US private equity firm Clayton, Dubilier & Rice (CD&R). The bidder offered to pay 230p a share in cash, a 29% premium to Friday’s closing price of 178p.
Rejecting the offer clearly means that the board believes the business is worth more. It looks like share buyers might think the same. On Monday, the Morrisons share price climbed to 240p.
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Where next for the Morrisons share price?
The rejection could lead to a higher bid. This could potentially lead to further gains for the Morrisons share price. New York based CD&R has until 17 July to make a firm offer or walk away.
A word of warning, however. If the bidder walks away, the Morrisons share price could be at significant risk if no other bids are put forward.
But other parties may well get involved to snap up this leading UK food retailer. This could potentially lead to an exciting bidding war scenario, possibly pushing the Morrisons share price higher. Amazon is already a Morrisons partner and is looking at expanding its retail offering so there has been speculation around its intentions.
A deal with the other major UK supermarkets is unlikely, however, I feel. The competition regulator is likely to reject any approach from the likes of Tesco or Sainsbury’s. A few years ago, the competition watchdog ruled against a tie-up between Sainsbury’s and Asda, saying it could reduce competition and choice, and increase prices.
It’s worth noting that private equity firms face no such barrier. They may see UK food retailers as attractive assets. Morrisons owns a significant amount of freehold property. It’s also a popular brand that generates plenty of cash.
And although Morrisons’ share price saw limited gains before the bid, the food retailer provided a respectable and relatively generous 5% dividend.
The whole food retail industry is facing several challenges. It’s becoming increasingly competitive. The popularity of discount supermarkets Aldi and Lidl has put pressure on the ‘Big Four’ (Tesco, Asda, Morrisons and Sainsbury’s) to lower prices. Also, food delivery is now a popular option for many customers, putting pressure on retailers’ profit margins.
The future is uncertain. New entrants like Amazon could really change the game with checkout-free stores and potential future deliveries by drone. Perhaps the sector is ready for some changes.
But would I buy Morrisons today? I’m a long-term investor so I think that although the Morrisons share price could drift higher, I’ll be watching from the sidelines as the bid news plays out and won’t be buying on this occasion.
Not just food for thought
Current private equity interest won’t be restricted to UK supermarkets alone, in my opinion. From a global perspective, UK shares feel unloved and undervalued. Since the Brexit vote, they’ve generally traded at a discount to US peers, for example. Uncertainty surrounding the post-Brexit trading environment has kept investors away.
But things may be changing as undervalued UK shares become attractive to global investors for a post-pandemic world.
I’d love to know which UK companies private equity firms might be interested in next. I reckon sofa retailer SCS could be of interest. It’s cheap with bags of cash on its balance sheet. If I ran a private equity firm, that’s where I’d look.