Morrisons’ new owner has plenty of wiggle room in takeover terms
CD&R has made fine-sounding pledges but they don’t stop this being yet another debt-fuelled buyout
Last modified on Mon 4 Oct 2021 14.55 EDT
The auction for Morrisons wasn’t worth the wait, but the mission to cast Clayton Dubilier & Rice as a kindly, far-sighted owner of the UK’s fourth largest supermarket chain continues at full swing. Andrew Higginson, chairman of Morrisons, did his bit by saying private equity sometimes gets “a bad rap” and generally makes its returns from businesses growing rather than via “financial engineering”.
Top marks for effort, but let’s not pretend that this deal, as it is structured at the outset, is markedly different from most debt-fuelled buyouts. First, the behavioural pledges offered by the buyer – covering sale and leaseback deals, staff pay and treatment of suppliers – don’t deserve the hype they have received. They are vague and only last for 12 months.
On possible property flips, for example, the new owner has said it “does not intend to engage in any material store sale and leaseback transactions”. What’s the definition of “material” in this context? Nobody has ever explained.
As for eschewing financial engineering, it’s hard to know if that is meant seriously. The takeover is worth roughly £10bn – £7bn for the equity plus £3bn of debt already borrowed by Morrisons – and CD&R has talked about investing equity capital of about £3.4bn. So debt could be £6.6bn, which is a mighty sum to load on to a business that made operating profits of £513m in its last pre-pandemic year. That degree of leverage is normally a mark of the financial engineer’s art.
There will be a plan to reduce borrowing, of course, but the cash probably can’t all be generated by running the business better (Morrisons was not badly managed) or by opening convenience stores at the 900 petrol stations owned by CD&R’s Motor Fuels Group. Disposals, think most analysts, must be part of the script.
Yes, of course, there will be growth projects on top. And, yes, CD&R’s reputation as a builder of companies is superior to that of most of its private equity peers. But, come on, this is still a leveraged buyout that relies on debt gymnastics, a fact that should not be lost amid the noise.
Sky plots next move in UK’s fibre expansion
Is Sky, now under the wing of the US cable and media group Comcast, about to upset BT’s plans for fibre broadband domination in the UK?
Well, it won’t derail the rollout because BT is committed to reaching 25m homes by 2026. But Sky has nuisance value on account of its 6 million broadband customers. If it were to throw in its lot with Virgin Media O2, BT’s only big rival in the digging business, the competitive dynamics would change. BT would still be the fibre leader on any likely projection of market share, but the challenger, in theory, would have greater financial confidence to lay more fibre more quickly.
The Sunday Telegraph’s report that Sky could invest in Virgin Media O2’s fibre network knocked 7% off BT’s share price at one point on Monday, a big move for a stock that had already been weak in recent weeks. The damage was contained to 4.7% by the close of the day, but nervousness in BT’s shareholder ranks is understandable.
By rights, Sky would be taking a huge commercial gamble by committing itself solely to the Virgin O2 network, either as an investor or just as a wholesale buyer of fibre capacity. It is hard to believe it would tie its hands that tightly: a deal with both big fibre players still feels more likely. But the terms of any alliance with Virgin O2 would still be annoying for BT.
The smart solution, of course, is to get the fibre in the ground faster. That’s easier said than done.
Next boss knows how to end supply chain crisis
Last week’s government spin said that supply chain strains had nothing to do with Brexit. This week’s explanation is that empty shelves and queues at forecourts are a necessary post-Brexit transition to a high-wage, high-productivity economy. The speed of the narrative rewriting is extraordinary.
By far the most sensible Tory voice on these matters is Simon Wolfson, chief executive of Next, who suggested in a column in the Evening Standard that the agonising over immigration could be resolved by allowing businesses to apply for as many work visas as they need but with two critical conditions. First, overseas workers could not be paid less than UK colleagues. Second, the employer would have to pay a 7% wage surcharge to the Treasury.
It’s an idea – indeed, a practical one that could form the basis of a compromise to satisfy all sides. One assumes, therefore, that it won’t get a hearing this week in Manchester.
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