The board of Morrisons has obeyed the first rule of takeover situations: generate competitive tension. Two bidders are better than one on that score, so the surprise offer from an odd-looking consortium led by the US investment house Fortress has delivered the required twist.
The new bid is pitched at 252p a share, or £6.3bn, versus the 230p offer from private equity firm Clayton, Dubilier & Rice (CD&R) that was rejected by Morrisons’ board a fortnight ago. The company’s shares closed on Friday at 240p and will be higher on Monday morning.
Is 252p, plus a 2p dividend, enough, though? It has been recommended by the board, which can point to a superficially impressive 42% premium over where the shares stood before the fun started. But the gist of most City analysis a fortnight ago was that Morrisons should be aiming higher: 260p, or even 280p. Viewed that way, the directors, led by chairman Andrew Higginson, have capitulated too easily.
Shareholders ultimately decide, and the views of longstanding investors Silchester, with a 15% stake, and Columbia Threadneedle, with 9.5%, will be critical. Neither has hinted yet at where it sees fair value. Like everyone else, both fund management firms will presumably wait to see if CD&R comes back and trumps Fortress.
Morrisons’ board can also plead that it has wrung pledges of good behaviour from the new bidder that can be loosely filed under “we’re not cut-and-run merchants”. The would-be owner is “fully supportive” of the latest pay deal to give all staff a minimum of £10 an hour and it “does not anticipate” a big programme of sale-and-leaseback deals on the stores.
One can sniff at soapy words about “recognising the legacy of Sir Ken Morrison [the late boss], Morrisons’ history and culture”, but the specific pledges are intended as binding under the takeover code. At least if CD&R does return with a new bid, it will have to say where it stands on those issues. It is assumed to want to play games of leverage with Morrisons property, because that’s what private equity does.
Fortress, it should be said, is also a private equity house in essence, although lines have become blurrier in recent years under the control of Japanese group SoftBank. Its co-travellers on the Morrisons adventure, though, are a Canadian pension fund and privately owned Koch Industries. One key distinguishing point is that the combo will deploy £3bn of equity, implying less debt than a classic private-equity model.
Therein lies a puzzle. The consortium says it wants to run Morrisons under the same management, pursue exactly the same strategy and not push debt to nose-bleed levels. So why does it think the business is worth 42% more than the valuation previously placed on it by the stock market? One answer is the ridiculously low valuations placed on supermarket assets by a market that is obsessed by growth and under-appreciates the defensive qualities of reliable cashflows and strong property backing, of which Morrisons has lots, including farms. It has taken outsiders to highlight the valuation discrepancy.
That points to a second rule of takeover situations: targets always looks prettier when bidders show up. Expectations are reset and definitions of base values are revised. In past couple of weeks, we’ve seen two instances (property firm St Modwen and private healthcare firm UDG Healthcare) where bidders have had to improve their offers, even after gaining a recommendation from the board.
At Morrisons, the board has given its blessing at a price that is credible, in conventional terms, but cannot be called a stunner. The company is probably doomed to lose its independence, but the takeover saga may yet deliver more twists.
GSK’s Walmsley shows strong immunity
Strange as it sounds, Emma Walmsley’s position as head of GlaxoSmithKline looks more secure after she came under fire from activist investor Elliott Management.
That is because Elliott, supposedly the most frightening beast in the hedge fund jungle, turned out to be a poodle. Its 17-page letter to GSK’s board last week was nine-tenths padding. The only substantive demand was that the company run a “robust process” to decide if current management is fit for life after next year’s demerger of the consumer healthcare division.
Chairman Jonathan Symonds found that timid request easy to bat away on Friday. The board “strongly believes” Walmsley is the right boss for “New GSK”, the core pharma and vaccines operation, and, because those units comprise the bulk of the company, there is no need for a selection process. It’s a reasonable view.
Elliott could up the stakes and be more aggressive, but what’s the point? Its shareholding is sub-5% (and, ridiculously, it hasn’t clarified precisely what it owns) and the mood among other investors is to give Walmsley a fair crack.
Nobody could claim she has cured GSK’s longstanding ills – the share price is still dreadful – but she has at least got the company to a point where demerger should add energy. Indeed, GSK is already making a few interesting investments in its pipeline, the latest of which is a deal to pay biotech firm Alector up to £1.6bn to develop and market drugs for Alzheimer’s and Parkinson’s.
Elliott is right when it says execution is critical, but that’s not a novel insight. Drug companies always take a long time to improve because that’s the nature of scientific businesses. Even AstraZeneca, the comparator by which GSK always suffers, took a while under Pascal Soriot. GSK was in a deeper hole when Walmsley was promoted four years ago and she deserves more time. It looks as if she’ll get it.
Furlough shouldn’t wind up when isolation is bringing hospitality shutters down
Rishi Sunak is making the next months unnecessarily painful for thousands of businesses. Such is the stress and financial hardship his policies cause, it is possible unemployment in the autumn will be higher than it needs to be.
At issue is the winding down of the furlough scheme at a time when employees are still required to self-isolate if they come into contact with someone who has contracted Covid-19. The chancellor is determined to scale down government support between now and October and studiously ignores calls for targeted safety nets for the worst-affected industries.
Last week the industry lobby group UKHospitality complained that many of its members had been forced to close their pubs and restaurants because of staff shortages following outbreaks of Covid.
Some businesses say the problems caused by this are even more severe than the recent difficulties they have had recruiting staff to meet the growth in bookings. Kate Nicholls, the group’s chief executive, said she had been in talks with the government for two weeks about changing the self-isolation rules.
Until this month, employers could rely on the furlough scheme to pay 80% of staff wages up to a cap of £2,500. Since 1 July, they have been obliged to contribute 10% of that, and next month it rises to 20%. That is a hefty whack if most staff are sent home – a situation made worse by a sick-pay system that offers only token financial protection.
“We urgently need a test-to-release and test-to-remain approach to allow hospitality to continue operating,” Nicholls said.
Maybe the chancellor is listening to those who look at the big picture and judge that the easing of most remaining restrictions on 19 July will prove such a boost to the economy that it overrides any minor glitches. That would be misguided. Small businesses are the lifeblood of economic activity and least able to deal with staff absences. For them, being forced to close in the months when government support is being withdrawn could be crippling.
If testing cannot be trusted, financial support should remain in place. Only that would be fair.