Supermarket shares rocket after Morrisons rejects £5.5bn bid
- Morrisons' board rejected offer from a US-based private equity firm on Sunday
- Supermarket chain said offer 'undervalued Morrisons and its future prospects'
- The move resulted in supermarket's shares increasing by almost a third
Shares in the UK's biggest supermarkets soared on Monday morning after Morrisons rejected a takeover bid from a US private equity giant.
Morrisons saw its share price increase by around a third soon after markets opened in London following a weekend of speculation around the future of the business.
On Sunday, Morrisons said it had been sent an 'unsolicited, highly conditional, non-binding proposal' from Clayton, Dubilier & Rice, a New York-based private equity firm.
It rejected the offer after the board 'unanimously concluded that the conditional proposal significantly undervalued Morrisons and its future prospects'.
Morrisons is the is the UK’s fourth-biggest supermarket and employs 118,000 staff.
Morrisons rejected an `unsolicited´ approach over the weekend (Anna Gowthorpe/PA)
But on Monday it appeared that shareholders thought CD&R might return with a higher bid.
The original offer was for 230p per share, while shares were selling for 237p.
It means that investors are likely to be betting that a second bid, higher than 237p, will be on its way shortly – a practice known as risk arbitrage. The second bid could come from CD&R or from another suitor.
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Any takeover by the firm would mean two of the UK’s ‘Big Four’ supermarkets have fallen into private equity hands, sparking fears for jobs.
Asda was this year bought by the British billionaire Issa brothers and TDR Capital for £6.8billion in a deal heavily financed by debt.
Supermarkets are viewed as attractive investments to buyout firms because they generate a lot of cash and tend to own most of their buildings outright.
In Morrisons' wake, shares in Sainsbury's rose by 4.4%, Ocado had gained around 3%, and Tesco was trading up 2.7% shortly after markets opened in London.
The announcement of the bid sparked speculation that these businesses might also draw interest from big investors who have the resources to take the supermarkets private.
Nick Bubb, an independent retail analyst, said: 'As noted by the FT today, CD&R aren't going away and we suspect a deal can be done in the 250p-260p area, so it should be a lively day for the sector on the stock market today, with an additional focus on the bid potential for Sainsbury and Tesco as well.'
Any deal for Morrisons or the other supermarkets would follow the £6.8 billion buyout of Asda by the billionaire Issa brothers, which was approved by the competition watchdog last week.
At Asda, the Issas and TDR Capital swiftly announced plans to sell off the supermarket’s petrol forecourts to the brothers’ EG Group after taking over, while its warehouses are set to be sold off and leased back.
Earlier this year, CD&R agreed a £2.8billion takeover of healthcare group UDG and a £308million takeover of plumbing group Wolseley. The buyout spree is being fuelled by the relatively low share prices of many UK businesses and the availability of cheap borrowing due to low interest rates.
The Bradford-based Morrisons chain has about 500 stores and 18 manufacturing sites, owning the freeholds to around 85 per cent of its properties.
It is also the UK’s second-biggest producer of fresh food, making everything from bread to beef and seafood.
Since the start of last year, buyout firms have swooped on more than 120 British firms in deals worth over £36billion.
