European Event-Driven Analyst

Jesus Rodriguez Aguilar

Jesús is an Insight Provider (Event-driven) on the Smartkarma network, where he looks across sectors at opportunities arising from securities mispricing (both credit and equity), share classes, bid announcements, prospective bids, and special situations. He has served as Economic and Business Advisor at the Spanish Congress in Madrid. Prior to that, he has worked in the City of London: as a Credit Analyst at Bloomberg; Event-driven associate at former boutique European Research; and doubled as Special Situations and Equity-linked VP (convertible bonds) at Merrill Lynch. Jesús has an MBA from the London Business School, a BA (Hons.) degree in Economics from the Complutense University in Madrid, and a BA (Hons.) in Law from U.N.E.D., also in Madrid.

Fortress's Recommended Cash Offer Trumps CD&R

Fortress/Morrisons: 272p Pre-Emptive Strike

CD&R Leading the Bid War for Morrisons with a Recommended Offer

Event-Driven

On 19 June, <a href="https://www.smartkarma.com/entities/wm-morrison-supermarkets-plc" target="_blank" data-smartkarma-citation="entities:22052:1" rel="noopener">Wm Morrison Supermarkets (MRW LN)</a>, aka Morrisons, said it had rejected a £5,522 mn cash offer from Clayton, Dubilier &amp; Rice (CD&amp;R). Morrisons said it had received an "unsolicited, highly conditional non-binding" offer proposal worth 230p/share (including final dividend of 5.11p/share, payable on 28 June), a c. 29% premium to the closing share price on 18 June. Morrisons said it had received the offer on 14 June and rejected it on 17 June.
The offer implies an equity value of £5,522 mn and EV of £8,713 mn, and values Morrisons at 7.8x EV/22e EBITDA and represents a 10% FCF yield (using Capital IQ consensus figures). At these levels, Morrisons' shares seem good value.
Bid speculation around Morrison has circulated since 2004, when Morrison acquired Safeway for £3 bn. Morrisons is Britain's fourth-largest grocer by sales. 
PUSU deadline: under UK takeover rules CD&amp;R has until 17 July to either announce a firm intention to make an offer or walk away.
Private equity is interested in UK supermarkets, because of their cash generation and freeholds.
In my view, Morrisons has the capacity to take on higher leverage: c. 85% of its stores are freeholds (book value is around £5.8 bn); it has gearing of 2.2x (including leases); and, FCF yield is near 10%.
After improvements in the business, Morrison is an efficiently run business in terms of management of inventories, working capital and profitability comparable to that of Tesco and Sainbury's, in my view. On this basis I believe that it is unlikely that a financial buyer would be able to strip a substantial amount of cash out of Morrison.
I estimate that by bidding 230p, CD&amp;R could achieve an IRR over 15% on year 6 (exit EV/EBITDA of 7.9x, g = 1.5%, cost of financing 200bps over 10-year swaps, 23% tax rate, 2022 Capital IQ consensus estimates).
A more aggressive bidder could offer 257p. The premium over 230p will depend on the bidder’s willingness to accept IRRs below 15% and the bidder’s view on increases in property values. The high leverage in any likely acquisition structure would allow the bidder to achieve substantial profits out of any revaluation of the property portfolio. Due diligence would be required to structure the financing of the offer. On this basis any bid would require the support of Morrison’s Board, in my view.
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However I believe that a financial buyer would add little to Morrisons.
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On 21 June, shares closed at 240.2p, a 34.6% increase, on hopes that CD&amp;R might raise its proposed offer. I would not rule out that Morrison's Board would be willing to discuss a higher offer, although I would wait until a firm offer is presented.
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On 19 June, Wm Morrison Supermarkets (MRW LN), aka Morrisons, said it had rejected a £5,522 mn cash offer from Clayton, Dubilier &amp; Rice (CD&amp;R). Morrisons said it had received an "unsolicited, highly conditional non-binding" offer proposal worth 230p/share (including final dividend of 5.11p/share, payable on 28 June), a c. 29% premium to the closing share price on 18 June. Morrisons said it had received the offer on 14 June and rejected it on 17 June.
The offer implies an equity value of £5,522 mn and EV of £8,713 mn, and values Morrisons at 7.8x EV/22e EBITDA and represents a 10% FCF yield (using Capital IQ consensus figures). At these levels, Morrisons' shares seem good value.
Bid speculation around Morrison has circulated since 2004, when Morrison acquired Safeway for £3 bn. Morrisons is Britain's fourth-largest grocer by sales. 
PUSU deadline: under UK takeover rules CD&amp;R has until 17 July to either announce a firm intention to make an offer or walk away.
Private equity is interested in UK supermarkets, because of their cash generation and freeholds.
In my view, Morrisons has the capacity to take on higher leverage: c. 85% of its stores are freeholds (book value is around £5.8 bn); it has gearing of 2.2x (including leases); and, FCF yield is near 10%.
After improvements in the business, Morrison is an efficiently run business in terms of management of inventories, working capital and profitability comparable to that of Tesco and Sainbury's, in my view. On this basis I believe that it is unlikely that a financial buyer would be able to strip a substantial amount of cash out of Morrison.
I estimate that by bidding 230p, CD&amp;R could achieve an IRR over 15% on year 6 (exit EV/EBITDA of 7.9x, g = 1.5%, cost of financing 200bps over 10-year swaps, 23% tax rate, 2022 Capital IQ consensus estimates).
A more aggressive bidder could offer 257p. The premium over 230p will depend on the bidder’s willingness to accept IRRs below 15% and the bidder’s view on increases in property values. The high leverage in any likely acquisition structure would allow the bidder to achieve substantial profits out of any revaluation of the property portfolio. Due diligence would be required to structure the financing of the offer. On this basis any bid would require the support of Morrison’s Board, in my view.

However I believe that a financial buyer would add little to Morrisons.

On 21 June, shares closed at 240.2p, a 34.6% increase, on hopes that CD&amp;R might raise its proposed offer. I would not rule out that Morrison's Board would be willing to discuss a higher offer, although I would wait until a firm offer is presented.




Wm Morrison Supermarkets

CD&R/Morrisons: Takeover Approach