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Deal of The Week - 6 Oct 2021
Deal of The Week - 6 Oct 2021
TARGET BUYER
TRANSACTION VALUE
Total: US$ 13.5bn
• Clayton, Dubilier & Rice (CD&R) won Fortress Investment Group after a three-
round auction on 2nd Oct to purchase Wm Morissons Supermarkets Pls (LSE:MRW)
DEAL • CD&R offered £2.87 for each of Morrisons' ordinary shares against Fortress’ bid of
DESCRIPTION £2.86; this offer is a premium of around 61% to the closing price of £1.78 for each
Morrisons share closing price on 18th June
• Morrisons' shareholders will conclude their final verdict on the deal on 19th October
• Supermarkets in the UK amounted at a market value of £205bn ($278bn) in 2020. It
is dominated by the ‘big four’ chains: Tesco, Asda, Sainsbury’s and Morrisons as
SECTOR they represent over two thirds of the market share
SUPERMARKETS • Suppliers are currently facing rising cost pressures attributed by the increase in
commodity and global shipping prices, and labour and raw material shortages. As
such, industry experts are forecasting a 5% rise in supermarket prices in 2021 Q4
• CD&R has been investing in Europe for more than 20 years, partnering with 21
businesses for an aggregate transaction value of approximately £22bn including
DEAL businesses in the UK and across retail and foodservice
MOTIVATION • CD&R's expertise in online sales will help Morrisons expand its business online.
Further, CD&R is also planning to leverage Motor Fuel Group, a large petrol station
business, to roll out the grocer's convenience store brand; ‘Morrison's Daily’
• CD&R highlighted its recognition in the legacy of Sir Ken Morrison as deeply
entrenched in Morrisons' history and culture. This recognition is a glimpse into
CATALYSTS & CD&R’s confidence in the management’s vision and strategic decisions
FNG OPINION • On the other hand, as Morrisons has 87% freehold ownership across the whole
estate, CD&R’s post-acquisition management of these real assets can potentially
mean uncertainty in Morrisons’ ultimate financial position
• Regardless, we are positive about the amalgamation of CD&R’s sector expertise and
years of experience, alongside Morrisons’ management’s strategy
FINANCIAL METRICS
Operating analysis
• Morrison's revenue grows by 6% in
2017, then it start decreasing from 2017
to 2021 for a cumulative decrease rate
of -3.67%
• EBIT is up 11% in 2017 and them grows
at a cumulative average of 12.88% for
the next four years
• In 2020, with the global, pandemic
Morrisons’ revenue rose by 1% and the
EBIT grew by 1.13%
Development Hypothesis (Investment Theses) Source: Yahoo Finance
• Employee-oriented management team: Led by Chairman Andrew Higginson who has served the company for
more than 40 years, the company has garnered employees’ loyalty through its effective leadership. The recent
pandemic outbreak has witnessed the management triple average annual bonus for all front line colleagues as
Morrisons pledges to guard the welfare of its employees
• At the forefront of the supermarket sector: Morrisons has not only managed to stand at the forefront of the
industry trend that is digitalization, but also thrived very quickly. The partnership with Amazon is one good
example as 2020 celebrated a more than tripled online sales year-on-year. Further, the management’s
ambitions continued as it signed a deal with Starstock in September 2021, an online marketplace that enables
hospitality businesses to order directly from wholesalers – as it diversifies and strengthens its revenue
capabilities
MAIN COMPETITORS
Competitor Country Revenue ($m) EBITDA ($m) EBITDA margin Ticker
• Founded by Joseph L. Rice, III in 1978, Clayton, Dubilier & Rice (CD7R) is an
INVESTMENT COMPANY investment firm with an investment strategy predicated on building
DESCRIPTION stronger, more profitable businesses
• Since inception, CD&R has managed the investment of more than $30
billion in about 95 companies with an aggregate transaction value of
approximately $150 billion
• Specializes in buyouts, acquisitions, and growth capital financings of
mature and underperforming companies
• $67bn enterprise value created at realized portfolio companies. It is
currently holding 34 portfolio companies employing over 225,000
headcount and generating more than $60bn revenue
• Headquartered and founded in New York, it currently employs more than
130 employees spread over North America and Europe
Clayton, Dubilier & Rice Fund X, L.P. Private Equity Oct-2016 Final Close 10,000
Clayton, Dubilier & Rice Fund IX, L.P. Private Equity Mar-2012 Final Close 6,430
Data from CapIQ showed Europe’s supermarket sector to range between EV/EBITDA 3-15x over the past
decade, averaging at around EV/EBITDA 8x. This sector has seen witnessed a spike in interest among investors
as it has proven itself not only resilient but also profitable during this pandemic. A case in point would be
Britain’s highly-competitive supermarket sector; In a short span of one year, UK’s third and fourth largest
supermarket, ASDA and Morrisons, have found themselves intensely pursued by Private Equity giants including
Fortress Investments, Apollo Capital and TDR Capital etc. George Godber, co-manager of the Polar Capital UK
Value Opportunities fund, cited the combination of low valuations, strong asset backing and strong cash
generation as the factors attracting investors’ interest.
Global valuations range between EV/EBITDA 8-15x since 2017, as shown above. The sector has steadily
garnered investors interest over the decade as supermarkets generate stable cash flow and many times, holding
prime real estate. However, it could potentially weaken retailers’ financial positions in the long-term if private
equity funds choose to strip and sell their respective real estates to finance their takeover.
Company
• Annual report 2021
• Fortune Business Insights
• Yahoo finance
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