LONDON (Reuters Breakingviews) - An $8.7 billion bid led by Fortress Investment has put a high price on WM Morrison Supermarkets. The British grocer’s board said on Saturday it had recommended a deal with a consortium including the SoftBank-owned investment firm, Canadian pension fund CPPIB and the real estate arm of Koch Industries. The buyers’ willingness to grant some constraining conditions makes them harder for others to beat.
The 254 pence per share offer, including a dividend worth 2 pence, comes two weekends after Morrisons said it had rejected a bid worth 230 pence per share from buyout firm Clayton, Dubilier & Rice. The new price is 42% above Morrisons’ share price before the latest flurry of takeovers. It is also higher than they have traded at any point over the past five years.
The Fortress-led group is valuing Britain’s fourth-largest supermarket at 9.4 billion pounds, after factoring in net debt and leases worth 3.2 billion pounds. That’s around 8.5 times its adjusted EBITDA for the year to January. Assume the new owners crank debt up to 5.5 times EBITDA, in line with the recent takeover of British supermarket rival Asda by the Issa brothers. That implies they’ll put in equity worth more than 3 billion pounds.
If Morrisons’ revenue grows by 3% annually – in line with analysts’ forecasts – and its EBITDA margin remains steady at 6.3%, the company could deliver EBITDA of 1.28 billion pounds after five years. Valued at the same 8.5 times multiple, its enterprise value would then have grown to 10.7 billion pounds. If the bidders use 30% of the company’s operating cash flow to pay down debt, they’ll double the value of their equity investment in five years, according to Breakingviews calculations. That’s equivalent to an internal rate of return of 15% - below the 20% hurdle typically used by buyout firms.
Any rival bidder will be under pressure to match the Fortress consortium’s employee-friendly promises. It has vowed to keep Morrisons’ head office, honour the company’s pay and pension commitments, and respect relationships with smaller farmers. Most importantly, it does not anticipate any “material” sales of Morrisons’ property portfolio, which Barclays analysts reckon is worth 8 billion pounds. That’s a promise other buyers may struggle to match. Fortress has shunted Morrisons into the premium aisle.
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- WM Morrison Supermarkets on July 3 said it had agreed a takeover offer from a consortium led by Fortress Investment which values Britain's fourth-largest supermarket operator at 6.3 billion pounds and tops a rival proposal from U.S. private equity firm Clayton, Dubilier & Rice.
- Under the terms of the deal, which Morrisons' board is recommending to shareholders, investors would receive 254 pence a share, comprising 252 pence in cash and a dividend worth 2 pence per share.
- The offer from Fortress, which is backed by Canada Pension Plan Investment Board and Koch Real Estate Investments, exceeds a proposal from CD&R worth 230 pence per share, which Morrisons rejected on June 17.
- Fortress is a global investment manager with about $53 billion in assets under management as of March.
- The offer represents a premium of 42% to Morrison’s closing share price of 178 pence on June 18 - the last business day before CD&R's proposal became public.
- CD&R had no immediate comment. Under British takeover rules it has until July 17 to come back with a firm offer.
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(Editing by Peter Thal Larsen and Karen Kwok)
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