For anyone who grew up in the north of England, Morrisons has always been somewhat iconic. Any Saturday morning spent people-watching over a cooked breakfast in the café at one of its bigger stores would reveal humanity in all its wonderous variety: from the radiant to the grotesque.
But it still comes as a surprise to find the UK’s fourth largest supermarket chain at the centre of the powerful currents now driving an extraordinary wave of M&A that is captivating corporate financiers, public market investors, private-equity sponsors, lawyers, bankers, analysts and rating agencies.
Global M&A in the first half of this year came in at just under $3 trillion, a record for any first half. The US has never been busier. The $930 billion of deals announced in Europe, the Middle East and Africa puts the region on track for its second-highest ever year, behind the all-time record of 2007 at the peak of the leveraged buy-out boom.
Private equity is back.
Sponsors have been a big driver of the near doubling of European M&A compared with the first half of 2020, and account for 38% of the six-month volume, up from an average of 27% during the first half of each year from 2018 to 2020.
In the first year of the pandemic, only a few private equity firms, such as KKR, Apollo and EQT, leaned into the opportunity to acquire businesses at low valuations. Most prioritized shoring up their portfolio companies.
This will go down as the year when the big wave of sponsor capital we have all been talking about for so long finally landed.
“While the growth of sponsor dry powder has been well documented, 2021 has seen an acceleration of its deployment and growth that has outpaced a buoyant broader M&A market,” says Cathal Deasy, co-head of global M&A at Credit Suisse.
Market shift
For the three years from 2018 to 2020, European M&A volume was neatly split: deals between public companies accounted for one half of all activity and private deals – including those between unlisted companies, as well as those involving sponsors – made up the other 50%.
In the first six months of 2021, private deals accounted for 69% of the volume in Europe.
“You have managers of all these private pools, including infrastructure funds, core plus funds as well as private equity, all looking to put capital to work,” says Deasy. “We’re seeing a sizeable shift in the public-private composition of the M&A market.”
Nowhere have sponsors been more active than in the UK, where the stock market has struggled to recover and the currency is still cheap thanks to the self-inflicted wound of Brexit and the government’s repeatedly too-little too-late response to the Covid pandemic.
Of the $42 billion of public-to-private deals announced in Europe in the six months up to June 30, fully $33 billion have been in the UK.
Of the $42 billion of public-to-private deals announced in Europe in the six months up to June 30, fully $33 billion have been in the UK
Local private-equity investors EG Group and TDR Capital took Asda private in February; I Squared Capital and TDR also negotiated an agreed offer for power generation equipment maker Aggreko; a consortium led by Blackstone acquired Signature Aviation; and now Fortress is looking to buy Morrisons.
Led by chair Andrew Higginson, the board of the Yorkshire based grocer recommended its 254 pence a share offer at the start of July, having rejected an earlier 230p bid from Clayton Dubilier & Rice.
CDR could yet make a new bid. Apollo is also now considering a possible offer.
“There is so much going for Morrisons,” says Louise Wallace, global co-head of the corporate/M&A group at law firm CMS, “including the number of its sites where it owns the freehold.”
Shareholders of the company, led by LGIM, have protested that they cannot evaluate the Fortress offer unless they are given the same level of insight as to what it might do with the property assets.
Fortress has said it will not do an opco/propco deal, but the suspicion remains that real estate will be central to its financial engineering.
“There’s all sorts of things you can with the property beside selling it,” says Wallace.
She adds that the appeal of the company that began from a stall in Rawson Market in Bradford in 1899 is that “Morrisons also has its own supply chain.”
The company argues that because it sources and processes half of the fresh food it sells in its own manufacturing facilities and stores that gives it close control over provenance and quality.
Wallace says: “Whoever gets Morrisons will do very well out of it.”
Tricky position
The $8.7 billion deal has awakened slumbering hostility towards private equity from public shareholders that don’t want to be taken for idiots.
Publicly quoted asset managers, already squeezed by passive index trackers, don’t want their own end-investors to feel foolish for paying them active management fees and then seeing them give up good stocks on the cheap to LBO firms with better ideas for extracting value.
Boards of directors are in a tricky position here. Private equity firms will continue to make offers. If boards recommend them and then see shareholders reject those offers against directors’ advice that might be the cue for board changes.
Activism is now the order of the day in Europe.
Healthcare has been one of the sectors where M&A activity continues at fever pitch. CDR secured a recommendation from the board of UDG Healthcare, headquartered in Ireland but listed in London. However leading shareholders such as M&G came out against it, a vote on the deal was pulled and the bidder had to increase its offer by another 7%.
There has been very little sign of hostile M&A deals, often a warning of overheating and a market top. But the atmosphere is getting testy.
This may be a sign of market efficiency. Public shareholders generally reject bids because they don’t offer fair value, not on moral grounds. Boards may ask for undertakings to protect workforces, pensions and even property assets.
Everyone – in the UK at least – remembers what happened when Kraft bought Cadbury a decade ago, having promised not to shut its factory in Somerdale. It did so as soon as the deal closed, claiming it now had new information.
The latest pushback from institutional investors feels a little different.
“I think Morrisons gets done,” says one sector analyst. “The latest bid is at a premium to the multiple paid for Asda and the board has got a better price than CDR’s first offer.”
If sponsors sense an auction in the offing and really want an asset, it would seem a good idea to offer full value for it in this market. Funding is cheap and abundant. Special purpose acquisition companies (Spacs) are also competing for acquisitions, the IPO market has seen high volumes and big public corporations are also buying assets as they restructure their portfolios.
No one predicts M&A will go back into the freezer, absent a vaccine-resistant variant of Covid.
If annualized, M&A deals announced in the first half in Europe would amount to 9.5% of stock market capitalization. The running average over the last 15 years has been 10.5%.
The question is whether or not there are enough investment bankers and lawyers out there to get all these deals done.
Thank goodness they’re not wasting time travelling. M&A bankers have an elevated sense of their own value even when the market is quiet.
Banks might have to pay a few more retention bonuses if it stays this busy.
