For much of the past few years, the Morrisons (LSE:MRW) share price found itself in a range between 160p-200p. The supermarket chain was performing OK, but without meaningfully eating into the market share of Tesco, the dominant player in the marketplace. This all changed from the middle of June, with a bidding war now taking place around the company. This has pushed the share price up to over 290p as I write on Monday. Here’s my take on things.
Bids pushing up the Morrisons share price
Back in the middle of June, the supermarket received an unsolicited bid of £5.5bn from US private equity firm Clayton, Dubilier & Rice (CD&R). This equated to around 230p a share, so naturally the Morrisons share price jumped up to this level. After all, if the value of the bid was at this level, then the market should adjust quickly and price this accordingly.
Morrisons rejected the bid, but since then other bids have been made, not just from CD&R. Fast forwarding to the most recent developments, we came into last week with the highest bid being from Fortress. This valued the company at 270p a share, along with a special dividend to be paid of 2p per share.
CD&R lodged a fresh bid on Thursday at 285p per share. This values the company close to £7bn, a clear jump from the first rejected bid. Throughout this process, the Morrisons share price has been tracking the bids higher. It jumped again as we came to the end of the week, actually trading above the offer level.
Fortress now has the ball back in its court, but it can’t keep going back and forward forever. The Takeover Panel might step in and launch a formal auction for the company instead. In theory, this should limit the volatility of the shares that we’ve been seeing over the past couple of months.
My take on things
It’s clearly apparent that the Morrisons share price was undervalued when it was trading in the 160p-200p range. CD&R probably knew that the initial offer was low-balling even at the time. Yet even with the current higher bid, the company would only be offering it with a firm conviction that it can flip it for a profit further down the line.
It’s estimated that one in 10 stores are currently loss-making. With debt on the books, selling stores and cutting costs is one thing a new owner could do to try and boost the value of Morrisons.
From my point of view, I don’t have access to the models and projections the private equity analysts are using. From my estimations, I don’t see much extra value on the face of it that can be squeezed out. In terms of valuation, the Morrisons share price is fairly close to all-time highs that were just above 300p. It has a P/E ratio of 75. From both angles, it doesn’t make sense in my eyes to buy at current levels.
I could be wrong, and higher bids could carry the share price into uncharted territory. But I think that I can find other stocks with less risk involved, so will be staying away.
