MORRISONS TAKEOVER BID: WHY IT MATTERS
The Blogger's credentials and sources are at the end of the post(but she did manage to score 97% on a UK Bankers Exam)
Summary
Morrisons' Board of directors has accepted an offer from American private equity firm Fortress to buy the supermarket, lock stock and barrel. Other American Private Equity firms have also made offers and more could be on the way.
Media coverage - much of it negative - has been impossible to ignore.
Morrisons - established 1899 - is not just any old supermarket. In line with its core value to focus on British products, it owns and runs farms, fishing fleets and manufacturing facilities.
The deal is not done yet; the offer has to be accepted by more than half of Morrisons' shareholders. But already Legal & General (a Top 10 Morrisons shareholder) has expressed concern, as have other City bigwigs, including senior financial journalists. History shows that shareholders usually rollover, take the money and damn the consequences... so long as the money's good enough.
Governments usually don't intervene in this kind of thing unless the 'public interest' (eg. defence, financial stability) is threatened. Boris' office says it's a 'commercial matter' but Business Secretary Kwasi Karteng has asked for a meeting with the Morrisons Board.
Although staff now get a say in such momentous decisions, consumers don't and both are hampered by lack of financial knowledge. But they're not stupid. They want to know why Morrisons was so quick to accept the offer.
Morrison's senior execs didn't really fight at all, unlike other major companies like M&S, Unilever and Astro-Zeneca (yes the vaccine makers!) who fought takeover bids and went on to do well.
The public also want to know how this huge change to one of the UK's Big Four supermarkets - so long established as part of the UK's food infrastructure - can happen so suddenly?
More to the point: what, if anything, can be done about it?
This post attempts to answer those questions in everyday language. Any opinions expressed and errors made are the Blogger's own.
Sections:
- What is Private Equity
- Private Equity takeovers have earned their lousy reputation
- Why Morrisons is such a popular Private Equity target
- Why didn't Morrisons fight back?
- Morrisons & Fortress: Their Side of the Story
- What now?
- What happened to the companies who fought back
- And one more thing...
1. What is Private Equity?
Private Equity (PE) in the UK has been around since the 18th century when wealthy individuals informally loaned money to starter enterprises. In the 1970-80's, PE was formally recognised as part of the UK financial industry.
Private Equity involves a lender (usually a group of partners who share gains and losses) who provides money in exchange for owning some or all of a company. PE is different from bank loans; PE firms have the legal right to interest and loan repayments whether or not the venture succeeds.
PE isn't all about unwelcome takeovers and mergers. Private Equity helps start-ups, provides venture capital (eg taking a punt with a small stake on baby tech companies) and helps established companies expand.
There are benefits. Companies backed by private equity often grow faster; the money comes with experienced private equity boffins who have the skills and focus to achieve goals more efficiently.
The growth continues while the going is good and the economy remains robust. But if a cyclical downturn does happen, an acquired company can find it difficult to pay its debts. The takeover field is littered with the corpses of acquired companies that died a drawn-out, pitiful death.
It is true that many private equity companies operate ethically and run investments responsibly - financially and socially.
But it is equally true that some don't give a fig about ethics or being responsible; they just want to make money - lots of it - within a 5-year timeframe. After that they will up sticks and sell at what they hope will be a good profit.
One can never tell in advance exactly how a buy-out like Morrisons will turn out. But history shows that PE involving buy-outs/takeovers as spectacular as Morrisons can employ brutal, predatory tactics.
And some buy-out firms have a distinctly unsavoury whiff.
Lavish promises are made in the run-up to a shareholder vote but are not legally enforceable.
Remember Chocolate maker Cadbury? It was taken over by the American firm Kraft quite awhile back. A week after promising to keep a Somerdale factory open, Kraft announced its closure. Worse, Cadbury UK headquarters was moved to low-tax Switzerland. The effects of the takeover were so traumatic, the UK's Takeover Board changed the rules to try to prevent a similar debacle in the future.
What about Boots the chemist, founded by UK Methodists in the 1840s? In 2007, several big investors banded together and bought Boots for £11bn. Almost £9bn of that sum was borrowed to pay for it and the debt was put on Boots' balance sheet. Within a few months, the new Alliance Boots moved its corporate headquarters from Nottingham to Switzerland and pays taxes there, not in the UK.
If you think new takeover rules to prevent another Cadburys made a difference, look at the sale just 5 years ago of UK super-chipmaker Arm to Japanese PE firm Softbank (who incidentally owns Fortress, accepted bidder for Morrisons). Despite promises to the contrary, Arm was quickly dismembered. When some of Softbank's other investments went very badly wrong, leaving them with vast losses, Arm was sold to American rival Nvidia in 2020. The UK Government is investigating.
2. Private Equity Takeovers have earned their lousy reputation.
It's not easy for the layman to find clear information about how PE takeovers operate (transparency is not a feature). But as 67goingon50 (see qualifications below) understands it...
The goals of this kind of Private Enterprise purchase is to cut costs (whether staff or taxes) at the acquired company, to transfer as much profit as possible from the acquired company to the PE firm within 5-years and to sell the business to someone else at a decent profit.
The method is seen in the way the deals are financed,.
To pay for the takeover, the PE firm uses a bit of its own money and a lot of borrowed money -- sometimes as high as 85-90% of the total cost. It's similar to (but not the same as) a mortgage.
After the financial crisis, lending for this kind of thing was usually limited to a maximum of 50%.
But the key thing is: the money borrowed by the private equity firm (to be able to buy the company it wants) goes onto the debt sheet of the company it is buying.
To be clear...the private equity firm can't buy the company it wants without borrowing money (usually half of it). But the PE firm's main interest is profit, not debt. The bank debt is shifted from the new owners' balance sheet to the company it purchased. The company that was taken over ends up repaying the loan it was bought with. Not surprisingly, the acquired company can end up with lower credit ratings and higher interest charges.
Furthermore, to raise profits while the acquired firm is under the control of its new owners, costs and spending are cut; lower standards are often the result. Jobs, pensions and suppliers are put at risk. The PE firm can create new partnerships (diluting the brand), or sell things that the acquired company owns, like warehouses. In order to continue to use what they used to own, the acquired company must pay rent to the new landlords.
There's also a lot of stuff involving 'financial engineering' of balance sheets which is way too complicated for the layman to go into but the result is the same - higher profits for the buyer.
3. Why Morrisons is such a popular Private Equity target
During the Pandemic -- apart from an entirely understandable initial hiccup -- supermarkets did a fantastic job keeping our cupboards full of food and household goods. But apparently, the stock market is concerned about the possible effect of online grocery shopping on the grocery sector and the possibility of more Pandemic lockdowns.
Before the bidding frenzy started, the Stock Market 'undervalued' Supermarket shares -- investors weren't interested in buying unless the price was lower-than-they were worth. The Stock Market apparently didn't/wouldn't take into account the sector's expected bounce as the economy gets moving again.
(Textbooks say 'Undervaluing' of shares can be encouraged or artificially created -- shareholders, advisors, and banks all stand to gain hugely during periods of takeover turmoil -- but if there have been suggestions in the financial press that that is the case with the grocery sector, the Blogger missed it.)
One analyst suggested companies quoted on the stock market are now too much of a challenge. (Shareholders are more inclined to rebel these days, especially against huge pay-packets for senior executives.) He suggests current CEOs of public listed companies are simply taking the money and running for the hills while potential CEO's are simply running away. Recent news that the Daily Mail is taking itself off the stock market and going back to private ownership gives pause for thought.
Meanwhile across the pond, post-pandemic American Private Equity has pots of money and sees UK shares as cheap. They have been snapping up big name UK companies like Tate & Lyle right, left and centre. The makers of hospital ventilators Smiths Group, who employ over 23,000 people, have already been approached regarding the sale of its medical division.
Morrisons is an attractive package for Private Equity. The supermarket owns 85% of its buildings and the land they sit on. Clearly, selling some of it to help pay the cost of a takeover is tempting. Morrisons also owns 20 manufacturing sites, 500 full-sized supermarkets, 300 petrol stations and a huge logistic business with nine distribution centres. Then add in meat and fish processing plants and the recently purchased fish and seafood business worth £40m - the first trawlers to be owned by a supermarket. That's not just a grocery store - that's the backbone of the north (above Boris' beloved Red Line) and the Buy British movement. It is also a significant contributor to the UK's food industry.
If it goes through, the Morrisons' deal will be the biggest since Boots.
If you believe the UK should be as near as possible self-sufficient in food production and should continue to maintain UK food standards (still the highest in the world), you would be justifiably alarmed. And probably fight like mad for Morrisons to stay English. Anyone with skin in the game who really believed in Morrisons would.
So why did senior Morrisons' execs cave so easily? Why didn't it mount a defence?
4. Why didn't Morrisons put up a fight?
Even if you believe Private Equity is essential to economies by making room for new ventures when companies inevitably fade, Morrisons clearly is not a failing supermarket.
The huge amounts of money which senior execs (who usually have large personal shareholdings) will gain once a takeover goes ahead can be a big factor in their response. According to reports, Morrisons Chief Exec David Potts, Chairman Andy Higginson and Chief Operating Officer Trevor Strain could make up to £35 million if the bid goes through. That's excessive, even if the team did sucessfully turn round a struggling Morrisons during the six years it's been in charge. Potts & Strain have apparently already earned nearly $24m and £17m respectively.
Last weekend (11/7), a Sunday Times piece in the business section suggested there was a link between the company's openness to takeover bids and shareholders' recent refusal to pay Potts & Strain bonuses for the Pandemic period, (when the Government was paying Morrisons financial aid). Morrisons was also reported to have been accused of misleading investors about why two board directors left.
If either of those two things are true, it's definitely not a good look for the Morrisons top team.
5. What do Morrisons and Fortress say?
They're both under increasing pressure.
Fortress have put out the usual promises but unusually issued a long letter to do so. It acknowledged Ken Morrison, who made the supermarket the wholesome grocers we know and love, and said it would respect the supermarket's history and culture.
Fortress 'commitments' were carefully worded. They said they:
- would not make 'material changes' (67's emphasis) to property
- are 'fully supportive' of £10/hour pay
- 'does not intend to' change the pension scheme
- 'does not anticipate material changes' to supplier payments (Blogger: that word again)
- would continue to support sustainability efforts (Blogger: widely considered 'admirable') and food security
Fortress also wrote to Business Secretary Kwasi Kwarteng and Defra Minister George Eustice to assure the government of its pledges.
It also pointed out that in 2019 it took over (the much smaller) Majestic Wine, and hasn't sold any of its properties. Fortress said it reversed planned job cuts at Majestic and opened new stores for the first time since 2015.
As for Morrisons, it wrote to 3,000 farmers assuring them that commitments made by Fortress, 'carry genuine weight'. The Daily Telegraph reported that Morrisons said: “...we considered very carefully whether Fortress would be a suitable and appropriate owner of Morrisons and whether their plans for the business would protect and develop the fundamental character of Morrisons.”
6. What Now?
Fortress, Morrisons, shareholders, advisers and bankers (who also stand to gain hugely if the deal goes through) are watching developments and waiting.
The Government is now reported to be looking at plans to bring larger private companies within the definition of 'public interest entity' and is looking deeper at foreign investors.
The meeting between the Business Secretary and Morrisons has yet to take place.
Morrisons shareholders have yet to approve the deal.
And Morrisons' farmers, staff and consumers?
If they are like others in London's financial district and elsewhere, they are still worried about Fortress' promises. And it is not cynical for them to speculate that the Majestic Wine deal was a trial run. That deal is still in its early days and the jury is still out.
But foremost is the knowledge that even now, under post Cadbury Takeover rules, any promises made before a company takeover is complete will not be legally binding.
Meanwhile, it is instructive to look at what happened to two big UK companies who fought back...and won.
7. They fought back: M&S and AstroZeneca
Astro Zeneca
In 2014, US pharmaceutical giant Pfizer offered to buy the independent UK Astro-Zeneca fo £69billion in a mega-merger. (Yes, they are the two companies now providing life-saving Covid vaccine.) It would have been one of the biggest pharmaceutical mergers ever; Chef Exec Pascale Soriot stood to make millions.
But AZ said No, worried about job losses and its own growth goals. Soriot and team launched what journalists called a 'robust defence which paid off brilliantly' and Pfizer withdrew its offer.
Since then Astro-Zeneca's Covid vaccine has been jabbed into millions of UK arms - 5 days ago, almost half of us - and AZ has won the gratitude of the nation.
Despite selling the vaccine at cost (without adding huge profit onto the cost per jab), the company's share price has shot up. Prospects for future growth are excellent.
As for Soriot, he may have lost millions in the Pfizer deal but over his time at Astro-Zeneca he is reported to have earned nearly £87 million. He's still there.
Marks & Spencer
Back in 2004 when Arcadia (Top Shop) was very successful, Chef Exec Phillip Green (yes, that one) made a bid for M&S, offering £9.1 billion.
67 loves M&S's response. The following is adapted from Ruth Sutherland of the the Daily Mail:
The non-executive board members 'rose up in anger in defence of the special place the group holds in the nation's affections.'In a weekend coup, Belgian chairman Luc Vandevelde and chief exec Roger Holmes were kicked out. Non-exec Paul Myners was installed as chairman and former M&S insider Stuart Rose was installed as Chief Executive.Myners went on to rally shareholder support at a general meeting.Rose delivered £1billion in profits and picked up a knighthood in the process.
M&S went on to have some brilliant years though recently it has struggled. But 'good ol' Marks & Sparks' is still very much a part of our lives, with loyal customers hanging on, waiting for 'our M&S' to discover new successes. Current leaders Archie Norman and store veteran Steve Rowe do seem to be re-discovering M&S's mojo.
It's a story to warm the heart of consumers - the people on whom a company's success ultimately depends.
8. One last thing...
For what it's worth....the explosion of activity in the UK Private Equity market seems to this observer to reflect the suppressed fear, rage and frustration of financial movers and shakers who have finally been let loose from the restraints of the Pandemic. We are going through a time not unlike the years after the Second World War when fatigue and strain affected decision-making in all areas.
As we try to come to terms with the 'new normal', perhaps the wisest thing to do is to put a hold on decisions which could irretrievably alter what makes us 'us', until calmer heads prevail.
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67goingon50's blogger Bonita Lee
Credentials:
...has worked in news journalism, finance and food over the course of a long career. She is Co-Author with Lord Howard Flight of 'All You Need to Know About Exchange Rates' (Sidgewick & Jackson 1988). Where news is concerned she is a nerd, reading widely and listening to an eclectic range of podcasts. Career markers include:
BSc (Hons) Health Sciences (University of Westminster)BA (Hons) Chinese: Mandarin (University of London)6 years food blogging10 years as a chefNEWS: (among the first female news editors at):
LBCHong Kong Govt. Info Services (Radio)BBC Radio 4 & World Service (Radio)Canadian Broadcasting Corp (TV)
FINANCE: international banking and financial public relations
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SOURCES: (in alphabetical order)
RESEARCH
Entreprenur: A Beginners' Guide to Private EquityWikipedia (last edited May 2021)
MEDIA
BBC News: 2 May 2014
Peston Picks 2007
Daily Mail: Alex Brummer: 14 July 2021
Tom Witheroe This is Money 12 July 2021
Ruth Sutherland 6 July 2021
Daily Telegraph: Ben Marlow 5 July 2021 + many other articles
Guardian: News: 11 July 2021
Editorial 7 July 2021
Legal & General Warning: 5 July
Scottish Daily Mail: Shoppers to pay the price Lucy White 5 July 2021
The Times: Treasury & Private Equity: 14 July 202
Business Pages 11 July 2021
Bosses set for millions:11 July 2021
Fortress: 5 July 2021
Also: Evening Standard, Channel 4 News
B Lee/Bright Sun Enterprises accept no liability for the consequences of any actions taken on the basis of the information provided.
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