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August 27, 2021
This month, supermarket giant Morrisons has been in the headlines for sparking private equity interest. This commercial awareness update explains what this means – and why supermarkets are so attractive.

What Is Private Equity?

Private equity is a form of private financing, away from public markets, in which funds and investors directly invest in companies or engage in buyouts of such companies (Investopedia).

With supermarket chains remaining asset-rich and cash-generative, it looks as though private equity firms may turn to Sainsbury’s upon conclusion of the Morrisons deal.

Asda Sale

The first private equity interest was directed at Asda, which was sold last year for £6.8bn to private equity firm TDR Capital and the Issa Brothers, marking the UK’s largest leveraged buyout since KKR bought Alliance Boots in 2007.

The deal came after the Competition Market Authority (CMA) rejected Sainsbury’s bid to buy Asda from Walmart on the grounds that allowing it to do so would diminish competition. Analysts have since pointed out that the CMA acts to protect competition but does not review whether the buyers would be ‘responsible owners’.

The deal was financed with £2bn of debt but, more interestingly, the Issa Brothers and TDR Capital only paid £780m of their ‘own’ money in the deal. A proportion of this figure was paid by selling off Asda’s petrol station forecourts to the EG Group, which is owned by the Issa Bros and also happens to be the fourth largest borrower of European collateralised loan obligations. It is estimated that the EG Group has more than $9bn in debt.

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Morrisons Sale

This summer, Morrisons was the target of a competitive private equity war as 3 firms were intent on having the final bid. In late July, Morrison’s board approved a £6.3bn offer by a consortium spearheaded by private equity firm Fortress. Since then, support has been withdrawn and now a deal with Clayton, Dubilier & Rice (CD&R) has been provisionally agreed. It is believed Britain’s fourth-largest supermarket chain will be sold for £7bn.

It’s likely Morrisons attracted such intense interest on account of having a low valuation with its June share value sitting below its pre-pandemic value. Morrisons also owns 87% of its assets, with much of its supply chain in the UK, enabling a future buyer to sell more assets off. Furthermore, the supermarket industry has proved to be relatively robust throughout the pandemic. This stability provides private equity firms with reliable cashflows which can be used to meet interest payments and service debts.

Sainsbury’s Bid

Last week, Sainsbury’s saw its FTSE share price soar after reports of a potential buyout bid from an American private equity firm. It is rumoured that Apollo Private Equity is considering a bid worth more than £7bn for Britain’s second-largest supermarket. Interestingly, Sainsbury’s only owns 57% of its properties yet may be bought out for a large price than rival Morrisons. Watch this space.

Talking points:

  • Why are private equity investors often deemed a last resort?
  • What are the pros and cons of using a private equity firm?  
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