Apollo considering bid for British supermarket chain, acquisition of SoftBank-backed Fortressress

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NEWPORT, Wallis, UK – 01/09/2021: A shopper is seen paying her purchases outside Morrisons supermarket in Wales.

Mae James / SOPA Images / LightRocket via Getty Image

WM Morrison, Britain’s fourth largest supermarket chain, may be about to become the target of an international bidding war.

Apollo Global Management announced Monday that it is considering a competing offer for the retailer after it agreed to an $8.7 billion takeover deal with SoftBank-owned Fortress Investment Group.

In a statement, Apollo said it was in the initial stages of evaluating a potential bid but had not yet submitted it to Morrisons’ board of directors.

On Saturday, the board recommended a cash offer of 254 pence per share ($3.52 per share) from a consortium led by Fortress, which includes the Canada Retirement Plan Investment Board and Koch Real Estate Investments. The bid values ​​the company at £6.3 billion.

The offer bypassed the previous unwelcome approach of US private equity firm Clayton, Dobellier & Rice (CD&R), which Morrisons rejected last month.

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However, Morrisons’ eighth largest shareholder, JO Hambro, said last week he would like to see a bid of at least 6.5 billion pounds ($9 billion) for the company.

The three largest shareholders – Silchester, BlackRock and Columbia Threadneedle – cumulatively account for more than 35% of the shares and have not commented publicly on Fortress’ proposal.

Morrisons shares rose more than 11 percent on Monday as the race heated up, while shares of other British supermarket groups Sainsbury, Marks & Spencer and Tesco were up.

Not the end of the saga

All eyes are now on whether CD&R will re-enter the race.

Barclays analysts on Monday highlighted two key reasons why the private equity firm could justify paying more than Fortress’ agreed offer.

“Firstly, CD&R has a larger UK retail footprint than Fortress – the former owns the MFG chain of petrol front yards, and the latter owns Majestic Wine – so we expect CD&R to be able to achieve even greater synergies with Morrison,” Barclays Managing Director James Anstead of Research said. Stocks in European retail in the note.

NEW YORK – Joshua Harris, co-founder of Apollo Global Management and senior general manager speaks at CNBC’s Corporate Investor Alpha Receipt conference on September 19 in New York City.

Heidi Gutman / CNBC / NBCU Photo Bank / NBCUniversal via Getty Images

“Second, Fortress has indicated that it does not plan to conduct sale and leaseback activity in connection with the Morrison Store property – CD&R (and/or other potential bidders) may be able to bid further if it chooses to explore these properties activities.”

Meanwhile, Bank of America analysts highlighted that Koch Real Estate’s participation in the Fortress-led consortium deal suggests it might consider store sales or leasebacks (which could result in properties selling but renting back) after all.

They added that “Morrisons owns more than 80% of its properties and we expect any new owner to investigate the potential for value creation within the property.”

Why is Morrisons so popular?

Ownership of so much of the store’s property, combined with a highly integrated supply chain, makes Morrisons a “bargain” compared to many of its overseas counterparts, said Susanna Streeter, senior investment and markets analyst at Hargreaves Lansdowne.

Streeter confirmed that Morrisons digital sales rose 113% last quarter. It also has a partnership with Amazon Prime and sells products through the Amazon Fresh brick and mortar store in London.

“W.M. Morrison’s tentacles are expanding across multiple supply chains as innovative products are developed,” she said.

“As the UK’s second largest food manufacturer, a large number of farmers and producers depend on groceries, not to mention the employees working in its stores and factories, so any offer to buy private equity is met with suspicion from unions, fearing that this support network could be dismantled.” .

As such, Streeter noted that the issue of asset divestitures and shop selling is a political issue. Morrisons has reportedly written to MPs seeking to allay concerns.

UK supermarket speculation is swirling

Bullish moves in the share price of rival chains indicate that some investors are increasing speculation about broader interest in the sector.

Vesa Equity Investments from US billionaire Daniel Kretinsky has built a stake in Sainsbury and is now its second largest shareholder, at nearly 10%, according to Refinitiv data.

However, Streeter noted that while the UK grocery market may look strong on the back of growth in online sales over the past year, it is starting to cool off a bit, with food retail sales down 5.7% in May as restrictions ease and a return consumers to restaurants. She suggested that this would likely lead to more price competition which could affect margins.

“So rather than turning into a cake fight, M&A activity is likely to be more of a dignified browsing through other potential targets,” she added.

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