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Why Real Estate Is At The Heart Of £8.7B Morrisons Takeover Bid

Morrisons is being pursued by private equity.

UPDATE, July 4, 4.00 P.M. GMT: Since this story was filed, Morrisons has accepted a takeover bid from a consortium led by Fortress.

Private equity firms are circling another UK supermarket chain, plotting a multibillion-pound takeover bid — and as with other recent giant M&A transactions, property is central to the appeal of the deal. 

On Monday, listed company Morrisons confirmed weekend press reports that it had rejected an £8.7B bid from Clayton, Dubilier & Rice. CD&R may still come back with a higher bid, and there is the possibility that other private equity firms including Apollo could also make a bid for the company, the Evening Standard reported.

Supermarkets have fared well during the pandemic-hit last 18 months, as they have remained open for business and people have been forced to eat at home more. 

But beyond their core business of selling groceries, the property portfolios of big supermarket chains have also drawn the attention of private equity firms, which can use real estate assets as a way of partially funding takeover deals. 

Fellow UK supermarket Asda was bought earlier this year for £6.8B by petrol station business EG Group and private equity firm TDR. The deal was undertaken using £3.5B of debt, and the buyers are in the process of recouping a big chunk of the equity they shelled out by selling Asda’s logistics portfolio. The assets were expected to fetch £1.2B, but fierce bidding has driven the price up to £1.6B, React News reported. 

Analysts expect any buyer of Morrisons to raise capital by selling off some of its store portfolio and leasing it back. Company accounts showed that Morrisons owned the freehold of about 85% of its stores, compared to Sainsbury’s, which owns about 60%. Analysts at Barclays reported that the store portfolio could be valued at around £8B, the Standard reported. 

FT journalist Jonathan Eley pointed out on Twitter that in 2015 Morrisons took a £1.27B hit on the value at which it held its stores, because big-box supermarkets were then considered a liability. But in 2020 it started to include the revenue from online orders picked in stores into the value at which they were held, which saw their value creep up by £49M. 

Real estate investors certainly value UK supermarkets right now, indicating that any buyer of Morrisons would have little trouble monetising its stores. Almost £1.5B of supermarket assets traded in the UK last year, Savills said, in spite of the malaise in the wider retail market. Yields for such assets are around 4% to 4.5%, depending on the length of the lease. Supermarket Income REIT raised £150M of equity in March from stock market investors for new acquisitions.