We had confirmation at the weekend that someone has their eye on buying out Morrisons (LSE: MRW). In response to rumours, US private equity firm Clayton, Dubilier & Rice (CD&R) revealed its plans to make a bid for the UK supermarket chain. There’s been no formal offer as yet, but we have an indication of 230p apiece for Morrisons shares.
Morrisons was quick to dismiss the mooted approach, which would price the shares at a 29% premium over Friday’s closing price. It would value the company at around £5.5bn. Morrisons said it had “concluded that the conditional proposal significantly undervalued Morrisons and its future prospects.”
We perhaps shouldn’t be surprised by CD&R targeting Morrisons shares. And to answer my question in the title, I expect there could be a fair bit more merger and acquisition activity in the UK market before 2021 is out.
Quite a few companies out there are still to recover from their pandemic hammering, and I reckon that makes for a lot of good buys for private investors. And if that’s true, how tempting must some of them be as takeover targets? Especially when interest rates are low and borrowed money is cheap? So what will happen to Morrisons now? In the short term, I expect Morrisons shares will enjoy a boost, at least for a while. I’m writing this before the market opens on Monday. But by the time some of you read it, I expect there will have been a nice price jump. And maybe even a knock-on effect for Tesco and Sainsbury’s?
What happens next
CD&R now has until 17 July to announce a firm intention or give up on the idea. And if others have been eyeing up Morrison’s shares for their own takeover attempt, their hands could now be forced. And, I do think the UK’s supermarket sector is ripe for consolidation, only thwarted by the competition regulator pulling the plug on the Sainsbury/Asda merger in 2019.
What, if anything, can private investors do to profit from acquisition approaches? Should we buy Morrisons shares in the hope of a bidding war? It’s one event that can boost the value of an undervalued stock. But such things happen so relatively rarely that we can be stuck holding what we see as undervalued shares for years.
Buy Morrisons shares now?
I have pondered acquisitions on and off for some time, mind. But I wouldn’t be looking for possible takeover targets, like Morrisons shares. Instead, I like the other half of the equation better. And I might go for something like Melrose. That group buys up manufacturing companies that it thinks are underperforming. It then turns them around and later sells them. One downside is that it’s a slow process. And that means Melrose can go years with little profit, and then enjoy a bumper year when it sells a holding. So it’s very much a long-term strategy.
Anyway, what would I do about Morrisons shares now? Well, I’d only buy if I wanted to hold for a decade or more, not because I hoped for a buyout. And when it comes to supermarkets, I’d buy market leader Tesco instead.
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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Melrose, Morrisons, and Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.