This is the way a four-month multibillion-pound supermarket takeover saga ends.
Not with a bang, but with a whimper.
Excited investors pushed Morrisons shares up to 297p on Friday in expectation of fireworks during Saturday’s dramatic one-day auction.
The reality was something of an anti-climax, with Fortress Investment Group limping in with an offer just 1p above Clayton Dubilier & Rice’s tabled 285p and the US PE house countering with the killer blow at another penny higher.
Terry Leahy’s gang – gathered at the offices of Goldman Sachs – mustn’t have been able to believe their luck at the ease with which they triumphed.
A source close to the bidding process says SoftBank-owned Fortress was hamstrung by the unwieldy size of its consortium, made up of the Canada Pension Plan Investment Board, Koch Industries and Singapore’s sovereign wealth fund, with Apollo Global Management also hovering on the fringes without officially joining.
“Because the bid had more players, it wasn’t able to be as bullish,” the source adds. “Those at the front edge were prepared to spend more. But your price discipline as a bidder is at the rate the slowest player in the party can move. That’s why it took so long for them to even respond. There was a huge amount of corralling to find the final best price that every one of their partners was willing to go to.”
Fortress upped the bid to 286p to see how CD&R would respond. When a raise came back, Fortress folded.
There has been some suggestion the ongoing supply chain chaos in the UK scared Fortress away, but short-term issues wouldn’t have put off an investor firmly focused on the long-term horizons. However, there is no denying current market conditions suit CD&R more than its rival thanks to its ownership of forecourt operator Motor Fuel Group. Synergies from expanding Morrisons’ convenience offering at forecourts will have buoyed CD&R – and rising fuel prices won’t have harmed either as the market grows ever less competitive.
The fizzling out of Saturday’s auction should also be good news for those worried about private equity’s malign intentions. There is unlikely to be quite as much pressure to sweat the assets harder, having offered just 2p more.
CD&R has fallen over itself to talk up its credentials as a guardian of Ken Morrison’s legacy, promising not to sell off all the crown jewels of the store freeholds – though some assets, whether they be distribution centres, petrol stations, manufacturing sites or a small handful of stores, are bound to go to make the economics stack up.
Morrisons chairman Andy Higginson says he remains confident CD&R will be “a responsible, thoughtful and careful owner of an important British grocery business”.
All signs suggest this will prove true, if the success story of B&M Bargains is anything to go by, with CD&R and Leahy leaving the discounter in better shape than they found it.
The fate of Debenhams may provide a warning over the excesses of private equity, but grocery legend Leahy is hardly planning to stain his reputation by becoming an asset stripper and going down in history as the man who sent Morrisons to the wall.
Questions of course remain about Leahy’s ultimate role at Morrisons, but it already seems clear Higginson will be making way for a new chairman.
And how will Morrisons CEO David Potts feel about working side by side with (or under) his former boss? The small fortune his shares are now worth will certainly soften any potential blows to his ego.
Uncertainty (and a great deal of speculation) now also hovers over the futures of the fate of the UK’s two remaining public supermarkets.
Fortress’ statement bowing out of the Morrisons auction ominously says that the UK remains “a very attractive investment environment from many perspectives”. The firm plans to continue to explore opportunities to “help strong management teams grow their businesses and create long-term value”.
Sainsbury’s shares shot up almost 5% again today to 298p, while Tesco, Ocado and Marks & Spencer were also swept along in the dash by investors to get exposure to the newly attractive sector as PE giants circle.
With the Morrisons deal set to draw quietly to a close – providing there are no surprises at the shareholder meeting – attention will now surely turn to what Apollo, Lone Star, Fortress and their peers plan to do with the mountains of dry powder at their disposal.