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Why did the Morrisons share price explode this week?

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The Morrisons (LSE:MRW) share price exploded this week, moving from 178p to 240p within the first hours of trading on Monday. That’s a 35% jump – quite impressive for a supermarket chain!

Since the surge, the stock has remained relatively stable. And this recent momentum has helped push the 12-month performance to around 25%. But the question remains. What caused this sudden rise in the Morrisons share price? Let’s take a look.

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A rejected takeover offer

There’s a relatively short list of events that can trigger such a massive upward swing in a company share price. Generally, these are caused by expectation-beating earnings reports, or in the case of Morrisons, a takeover bid. US private equity firm Clayton, Dubilier & Rice (CD&R) recently made an offer of 230p per share. But after consideration, the board of directors unanimously rejected it.

This decision was based on the board’s opinion that the “Conditional Proposal significantly undervalued Morrisons and its future prospects.” In other words, the management team believes the Morrisons share price can climb a lot higher than 230p.

But this isn’t the end of the story. CD&R has until 17 July to make another more tempting offer to both the Morrisons board and shareholders. Meanwhile, other firms may enter the arena, potentially sparking a bidding war. Needless to say, if this were to happen, the Morrisons share price would likely continue to climb to reflect the potential offers.

The Morrisons share price has its risks

What’s next for the Morrisons share price?

While the prospect of a potential buyout is alluring, it’s important to remember it may not happen. And should a higher bid fail to emerge, the Morrisons share price could fall just as quickly as it rose.

Personally, I remain pretty sceptical of a bid emerging from another prospective buyer. There aren’t that many private equity firms with almost £6bn of cash lying around to outright purchase one of the biggest supermarket chains in the UK. What’s more, while there’s speculation that other retailers like Tesco or Sainsbury’s may make an offer, I highly doubt regulators would allow the transaction to proceed on anti-competition grounds. This actually happened when Sainsbury’s and Asda tried merging in 2019.

Under the assumption that no takeover takes place, can the Morrisons share price climb higher? Over the long term, I think it’s possible. The grocery retail industry is undergoing some disruption from discounters like Aldi and Lidl, and online delivery services like Ocado. However, Morrisons appears to be adapting relatively well by lowering its prices, as well as offering home delivery solutions.

As a result, the business has managed to essentially retain its market share over the past four years. And while I doubt any explosive growth is on the horizon, its historical 4% dividend yield looks like it could be an attractive addition to my income portfolio.

Having said that, I’m keeping Morrisons on my watch list for now. If I’m right and another takeover bid fails to emerge, then the subsequently falling Morrisons share price could be an opportunity to snatch up some shares at a discount.

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Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended Morrisons. 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.

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