On Saturday morning, exciting news broke for patient shareholders in WM Morrison Supermarkets (LSE: MRW). The UK’s fourth-largest supermarket has agreed to be taken over by a new consortium of US investors. Hence, the Morrisons share price should be set to rise on Monday morning, when the market reopens.
Morrisons turns away one bidder
Two weeks ago, Morrisons received an unsolicited offer for the group from US private equity firm Clayton, Dubilier & Rice (CD&R). CD&R offered 230p a share in cash to buy the grocer. The previous Friday, the Morrisons share price closed at 178.45p. Thus, this bid came at a premium of 28.9% to the previous closing price.
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As usually happens at the start of takeover battles, Morrisons’ directors immediately rejected this opportunistic approach. As City tradition demands, they claimed that the offer significantly undervalued the business and its future prospects. Nevertheless, the Morrisons share price closed at 240.2p on Monday, 21 June. It then hit a 52-week high on 30 June, peaking at 251.7p.
The Morrisons share price: 252p (plus a 2p dividend) offer
Today, news emerged of a second bid for the Bradford-based supermarket. Intriguingly, this second approach came from a completely different trio of investors. The trio is led by SoftBank-owned Fortress and includes Canadian pension fund CPPIB and a division of Koch Industries. They’ve offered 252p a share, plus a special dividend of 2p, totalling 254p per Morrisons share. As this deal has the backing of the grocer’s board, the Morrisons share price should rise to reflect this second bid.
The bid values Morrisons’ equity (its share base) at £6.3bn. Adding in £3.2bn of net debt gives a buyout price of £9.5bn. The Fortress-fronted bid of 254p/share offers a premium of more than two-fifths (41.2%) to the Morrisons share price on 18 June. However, with two bidders slugging it out for control, it might be that an even higher bid might emerge. Indeed, it’s entirely possible — but perhaps less likely — that a third bidder or other counter-bids might emerge. This may not yet be the endgame…
UK shares appear cheap
For me, this latest takeover battle adds weight to my argument that UK shares (especially FTSE 100 stocks) remain undervalued. This will be the largest private-equity buyout of a UK-listed business since 2007, when KKR bought high-street chemist Boots. So far in 2021, at least 12 UK-listed companies have been approached by buyout firms. Furthermore, I expect more knockout takeover bids to emerge as 2021 goes on. With the Morrisons share price poised to be 40%+ higher than a fortnight ago, it’s clear that cash-rich US investors are keen to buy cheap, solid British businesses.
Many of Morrisons’ 110,000 employees (across 497 stores) own shares in the group, so they’re set for a big windfall. Nevertheless, any change of ownership will unnerve staff, even though the new bidder has agreed to a minimum wage of £10 an hour. I hope some read my comments on 11 May, when I said, “I’d be willing to buy at the current Morrisons share price” (of 183.95p). The shares will be worth at least 38% more on Monday. I don’t own Morrisons stock, but this vindicates my conservative, value-oriented approach to investing in cheap UK shares.
Finally, although most multi-party approaches eventually emerge with a winning takeover bid, this is by no means guaranteed. Both bidders could walk away, leaving the shares in freefall.