The news this week that Morrisons’ founding family are attempting to take the company private came as a surprise.

The news this week that Morrisons’ founding family are attempting to take the company private came as a surprise.

The family, which collectively remains a significant minority investor at around 10%, is seeking to work with two private equity groups, Carlyle Group and CVC, and may be looking at an offer for what is a struggling retailer at present.

Not surprisingly, there is no confirmation or otherwise of such potential activity at this stage. However, given Morrisons’ trading weakness and relatively low valuation, such headlines and potential initiatives are to be expected to some degree at this time, in my view.

Indeed, I would expect a number of serious private equity investors to be running the rule over Morrisons. Furthermore, I would also expect this interest to support Morrisons’ share price and happen to believe that its freehold asset base is a material source of downside support too.

One additional point we would make in relation to all of this potential activity and noise is that we would harbour mild concerns if we were Ocado. Whilst it would not be the cheapest thing to do, any new owners may deem the best thing to do if there was change would be to re-negotiate or even tear up the 25-year online food contract.

This is because we do not believe, as maybe the case for any new owners too, that this is a feasible plan and dealing with it sooner rather than later may be the best course of action to a recovery story.

The news of a potential bid comes in a difficult week for Morrisons, when the latest Kantar Worldpanel data showed it to be the worst performing major grocer. Quite why Morrison’s is performing so poorly is a matter of debate.

We happen to believe that it emanates from the ostracising of core customers with the implementation of Fresh Formats just as hard discounters and high street value retailers started to gain share. Additionally, more affluent customers that may be attracted by higher category lines did not arrive despite the new offer.

Morrisons did lack access to the growth convenience and online markets but to over-emphasise this point is to misjudge the more fundamental processes to our minds.

Whatever way one characterises Morrisons’ current trading strategy, which embodies considerable promotional participation still, it is clearly not working and one senses that fundamental change is necessary, which cannot revolve just around base price, although it probably needs some attention.

If change does not arise then there is the danger of a material contraction of earnings but there are no quick nor free fixes; the rest of the industry may be watching nervously on this front too.

We now watch matters with interest in terms of the potential bid, albeit our central expectation is that the status quo will persist for now. If recent trading momentum is sustained for any reasonable period of time material downgrades can be expected.

Clive Black is an analyst at Shore Capital