As CD&R moves into pole position ahead of Fortress to acquire Morrisons, Retail Week compares the competitors’ strategic plans for the grocer

  • External pressures and fears of private equity ownership have forced the rival firms to put forward detailed strategies
  • Both Fortress and CD&R have pledged to maintain Morrisons’ vertically integrated model and freehold property portfolio
  • CD&R’s large UK forecourt portfolio and relationship with Morrisons through Sir Terry Leahy have put it in the box seat

On Thursday night, Clayton, Dubilier & Rice (CD&R), whose unsolicited and rebuffed 230p-per-share £5.5bn offer represented the opening salvo in the fight for Morrisons back in June, returned with a 285p-per-share offer valuing the grocer at £7bn

The price is £300m more than the previously recommended offer from Fortress

For all the private equity money being thrown around, the battle for Morrisons is not just being fought in pounds and pence. Its status as the UK’s second-largest food manufacturer and biggest single customer of British farmers has given the contest political significance after the pandemic and Brexit pushed food manufacturing and supply to the top of the agenda. 

Morrisons’ extensive freehold property portfolio has also given the media free rein to make comparisons with past retail private equity takeovers, which saw extensive sale and leasebacks of property saddling retailers such as Debenhams with unmanageable levels of debt.

Because of such sensitivities, both Fortress and CD&R have given much more detailed strategic proposals for their prospective stewardships of Morrisons than normal. 

UK retail experience

Both have put past successful ventures into UK retail at the heart of their bids for Morrisons: CD&R has cited its contribution to the success of value retailer B&M and Fortress has highlighted its approach at Majestic Wine.

Majestic Wine Beckenham checkout

Fortress has invested in Majestic Wine and opened new stores

CD&R said it had “an outstanding track record of investing in initiatives to support people and their success”. It highlighted that between 2012 and 2018, B&M expanded its footprint, increasing UK stores and employment by 80% and 120% respectively.

Under CD&R, B&M successfully completed a £2.7bn float on the London Stock Exchange in June 2014. When the investor sold its last remaining stake in the business four years later, it had made more than £1.5bn from the float.

Fortress has pointed out that during the pandemic, Majestic opened new stores for the first time in five years. 

It also played up reappointing former chief executive John Colley to Majestic and its reversal of the previous management’s plans to slash staff numbers, sell freeholds and shut stores.

Sources close to Majestic praised Fortress’ hands-off approach with senior management and willingness to invest.

While Majestic has steadied under Fortress’ ownership, CD&R’s track record with a much larger UK retailer in B&M, combined with its successful float, gives it an arguably stronger record.  

Upholding Ken’s legacy

CD&R and Fortress have pledged to uphold and continue the legacy of former owner Sir Ken Morrison. He was notoriously averse to debt and committed to high property ownership and the vertically integrated model that has made the business he left behind so appealing to private equity. 

Terry Leahy and Ken Morrison - RWA 2011 2

Sir Ken Morrison and Sir Terry Leahy at the Retail Week Awards in 2011

On Morrisons’ vertically integrated model, both CD&R and Fortress pledged not to dismantle it in any way. Fortress said the model gives Morrisons an “excellent basis for continued, long-term growth”. In its bid document, CD&R called it a “unique operational strength” of the grocer. 

Considering this, a trump card in CD&R’s hand may be senior adviser Sir Terry Leahy. A giant in UK retail, Leahy was also a great admirer of Morrison, a point he illustrated in a video message accompanying CD&R’s offer, saying: “I knew Sir Ken Morrison well and I understood his values and vision.”

Leahy was such an admirer that he asked for Morrison to present him with his lifetime achievement award at the 2011 Retail Week Awards.

As the former chief executive of Tesco, Leahy also worked with the three most senior people currently at Morrisons. Chair Andy Higginson was an executive director under Leahy at Tesco, while current chief executive David Potts and chief operating officer Trevor Strain were also colleagues. 

When CD&R’s interest in Morrisons was first made known, some analysts suggested the former Tesco triumvirate would bridle at working again under Leahy’s direction.

In a bid to fend off such rumours, Leahy said he was “so excited at the prospect of working with David Potts and the management team to create more success”.

Leahy’s working relationship with the Morrisons senior management team and its past owner may well give CD&R another advantage over Fortress. 

Freehold property

Morrisons is unique in UK grocery in that it owns the freeholds of 87% of its 497 supermarkets, as well as its 20 food manufacturing locations. 

Both CD&R and Fortress have committed to no “material” sale and leasebacks of Morrisons’ store portfolio, and to keeping its head office in Bradford.

Exactly what “material” means is unclear. Given that key competitors Tesco and Sainsbury’s only own around 50% of their respective freeholds, a potential bidder could still sell and lease back more than 20% of Morrisons’ property freeholds while maintaining an advantage. 

Neither bidder has made the same “material” guarantee when it comes to Morrisons’ food manufacturing plants or its nine distribution centres. 

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Asda’s new owners the Issa brothers and their partner TDR Capital are seeking to sell the grocer’s distribution network for £1.7bn, which highlights the value that a new Morrisons owner could realise without selling supermarkets.

Prior to its takeover by SoftBank in 2017, Fortress was known for investing predominantly in property through sales and leasebacks including 76 Marks & Spencer stores it acquired in 2016 for £450m.

Atrato Capital, which advises the grocery property investment firm Supermarket Income Reit, believes the private equity battle for Morrisons is fundamentally a fight to control its real estate portfolio, rather than its grocery business. 

Principal Steve Windsor explained: “The stock market doesn’t appreciate the fundamental corporate value of grocers like Morrisons. The market cap of the UK grocers simply reflects a multiple of trailing underlying earnings [EBITDA] and fails to incorporate the hugely material value of the underlying real estate.”

Forecourts and wholesale

Fortress has achieved success with forecourt investments internationally, notably with the US-based group United Pacific which it acquired in 2013. While Fortress has played up the success of United Pacific under its ownership, it mentions no plans for Morrisons’ existing forecourt portfolio. 

The first Morrisons Daily store at a Shell garage in Crewe

Morrisons has stores based at 339 petrol stations

CD&R owns MFG, one of the UK’s largest independent forecourt businesses. Acquiring Morrisons would offer CD&R the opportunity for a commercial tie-up between the grocer’s 339 petrol stations and MFG’s 918-strong forecourt empire.

Morrisons has recently unveiled plans to open a further 300 of its Daily convenience stores through its partnership with McColl’s and also has around 60 c-stores on Rontec forecourts around the UK, but it still lags behind Tesco and Sainsbury’s in convenience. Rolling Daily formats out across MFG’s estate would significantly increase its market share in convenience at a stroke. 

CD&R said as much in its bid document, noting it would “accelerate the development of Morrisons’ wholesale business and convenience portfolio through supply and branding arrangements” and “enhance the customer experience within MFG sites and develop Morrisons’ engagement with a broader customer base”. 

Retail analysts at the time of Fortress’ original bid for Morrisons suggested it was keen to play down any plans for Morrisons forecourts because of the added scrutiny that would bring from the Competitions and Markets Authority (CMA).

The completion of the Asda takeover by the Issa brothers, owners of EG Group, was delayed for months while the CMA investigated competition concerns at the petrol pump.

However, the similarities between a potential MFG and Morrisons tie-up with EG Group and Asda may also offer CD&R a glimpse into how the CMA would react to a completed deal and a blueprint for how to navigate any potential concerns.

EG Group sold 27 stations to get the Asda deal over the line – a relatively small price to pay in the long run. While CD&R would be keen to avoid a drawn-out CMA investigation, it would unlikely walk away from a £7bn acquisition over a few petrol stations.

AJ Bell analyst Danni Hewson said: “CD&R’s forecourt operation might require a few tweaks to please the UK’s competition watchdog but adding Morrisons’ to the portfolio will put them in a strong position to be at the forefront of the switch to electric vehicles.”

Frontline staff

Morrisons store employee in high-vis key worker jacket

Fortress and CD&R have pledged to leave alone staff pension plans

The essential worker status given to frontline supermarket workers during the Covide crisis, combined with the key role the grocers played in feeding the nation, has heightened scrutiny of Morrisons bidders’ plans for its 120,000 staff.

Both CD&R and Fortress have committed to honouring Morrisons’ landmark pay award that gave all frontline staff a minimum of £10 an hour. The increase, phased in since April, will ultimately give 96,000 of the grocer’s workers a pay rise. 

With private equity takeovers in the past, such as with BHS and Arcadia, pension plans have become a painful sticking point. To that end, both Fortress and CD&R have made guarantees to leave alone current staff pension plans.

The next owner of Morrisons will ultimately win control of the grocer by paying the most money. But the fact that two rival firms are making big commitments about how they would run its supermarkets, manage its property freehold and treat staff and suppliers can only be positive. 

Fortress has urged Morrisons’ shareholders to sit on their hands while it considers its next move. There will likely be a few twists and turns left in this saga, but the advantage has definitely swung towards CD&R.