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Shoppers queue to pay in a Morrisons supermarket in London, England on Mar. 20, 2020.
Daniel Leal-Olivas/AFP via Getty Images
Shares in
Amazon
partner
Wm Morrison
rose as much as 11% on Monday, after New York-based
Apollo Global Management
was the latest private-equity firm to confirm interest in the U.K.’s fourth-biggest grocer.
Apollo said in a statement it is “in the preliminary stages of evaluating a possible offer for Morrisons,” but that no approach had been made to the board of Morrisons and “there can be no certainty that any offer will be made.”
Read:Shares in Amazon Partner Morrisons Soared After a $12.10 Billion Approach. These Retailers Could Also Be Targets.
The development comes just two days after a £6.3 billion ($8.72 billion) takeover bid from a group led by SoftBank-backed Fortress Investment Group was accepted by the supermarket chain based in northern England, which was started as a market stall in 1899.
Just weeks before this development it rejected an unsolicited £8.7 billion bid from private-equity firm Clayton, Dubilier & Rice.
European stocks are beginning to become more attractive to global investors following the height of the Covid-19 pandemic, as the success of vaccine programs trigger the reopening of European economies, with some stocks seen as being relatively cheap.
Last month, the sale of
Walmart
-owned Asda, the U.K.’s third-largest grocer, to British retailer EG Group and private-equity firm TDR Capital, was cleared by regulators.
Retailers, faced with fierce competition from discounters and the online giants, have fairly low valuations, and benefit from property ownership and good cash-flow generation. This is good news for Morrisons’ investors if there is a bid battle.
The U.K.-listed supermarket group has a wholesale deal with Amazon providing the technology giant with produce for same-day delivery. While the business would be a good fit for Amazon, which already owns WholeFoods, it has tended to avoid bid battles.
Morrisons’ shares had fallen 5.11% over the past 12 months, before the bid interest, dragged down by the tough competition, low margins, and many of the veteran players having to pay high rent on stores at a time when shoppers are making more of their purchases online. Morrisons has 497 shops.
Read:U.K. Grocer Morrisons Is a Smart Investment for the Coronavirus Era
The grocer has a different strategy to its rivals. It owns 19 food-producing sites, ranging from abattoirs to farms, which means it has more control over its supply chain and has the potential to make higher profit margins. It also owns the freehold for 85% of its stores, which could be leveraged for future borrowing.
Property could be key to unlocking value and make retail a good defensive play.
Richard Chamberlain,
an analyst at RBC Capital Markets, wrote a note on Sunday highlighting the attractions of the retail sector for longer-term private investors.
“Although the food retail sector faces a tough outlook from discount competition and cost pressures on margins, we think it remains attractive to private-equity firms for its quasi bondlike cashflows,” Chamberlain wrote.
“We do think though that property asset backing is desirable for private-equity investors, as it supports a higher degree of financial leverage, and would be helpful for securing a higher credit rating in the bond market were a business to be refinanced,” he added.
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