Morrisons’ founding family, which has a 9% stake in the supermarket chain, have approached private equity firms to take the listed grocer private. Retail Week takes a look at the City’s reaction to the news.
Given Morrison’s trading weakness and relatively low valuation, such headlines and potential initiatives are to be expected to some degree at this time, in our view. Indeed, we would expect a number of serious private equity investors to be running the rule over Morrison. Furthermore, we would also expect this interest to support Morrison’s share price. 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 contract online. 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– Clive Black, Shore Capital
We are sceptical that a deal is likely given its size and the fundamental trading weakness of Morrison. Potential buyers will likely be nervous of whether the business is fundamentally broken. The reports suggest that the approached firms have not been especially enthusiastic so far. Having said this, Morrison does have a sizeable asset base and a private owner could be much more aggressive in cutting capex and selling assets without the ‘loss of face’ that might worry current management. The apparent support of the family also removes a potential obstacle. We would expect the shares to be up materially this morning, but not to the extent that they suggest a deal is probable. We would also expect Tesco and Sainsbury shares to respond positively - James Anstead, Barclays European Food Equity Research
Our view is that a potential buy-out or IPO of their freehold assets is a credible outcome. We estimate that 453 freehold stores (c.52 stores on 15 year leases) at Jan 2014 are in the balance sheet at a net book value of £6.58bn. This equates to £14.5m per store, below the rebuild value, and gives a book value per sq ft of £525. We know that recent Morrisons sale and lease backs, on 35 year leases, have been sold at 4.57% and the current initial yield on scarce Morrisons sites could be as low as 4.25% which implies a market value for the freehold stores of £10.5bn. This excludes the 10+ distribution centres, manufacturing assets, head office, Kiddicare and other investments that we estimate could be worth over £1.5bn. We estimate Morrisons has c.20m gross sq ft of freehold retail space, ex. car parks and access roads; if valued at £500 sq ft suggests it is worth £10bn.
Morrison’s management plan for a £800m sale and lease back could be undermined by any sale of the c.9.5% family equity stake.We are not convinced by the current retail strategy (i.e. rapidly opening 100’s of C-stores on poor sites) or the merits of increasing rental costs to create a short term buy-back/special dividend. Our view and that of activist investors is to IPO a £2.5bn-£3bn Morrisons property fund. This new company could be 25% owned by institutions and 75% owned by Morrisons, and hence fully consolidated - Mike Dennis, Cantor Fitzgerald