Yahoo Finance Sainsbury's and M&S in firing line as weak pound attracts overseas investors
The bidding frenzy to seize control of Morrisons is expected to spark a flurry of takeover offers for UK firms as foreign investors seek to cash in on low interest rates and the weak pound.
The City is braced for more bids from buyout firms after the US private equity firm Clayton & Dubilier and Rice (CD&R), backed by former Tesco boss Sir Terry Leahy, emerged the victor in a £7bn shoot-out for the supermarket chain Morrisons.
Experts predict that the recent plunge in sterling is also likely to lure investment from family offices, sovereign wealth funds, and high net worth individuals with cash to spend.
Clive Black, a retail analyst at Shore Capital, said: “The UK is going to remain of interest so long as interest rates remain low, and there is lots of liquidity available.”
Meanwhile, Softbank-backed Fortress, which lost out in the battle for Morrisons on Saturday, is expected to be exploring further opportunities in the UK after saying it remained “a very attractive investment environment”.
Last week the pound plunged to its lowest level since December, weakened by Britain's shortage of truck drivers and a surge in energy prices, while a hawkish-sounding Federal Reserve and worries about Chinese growth boosted the dollar.
This year is shaping up to be the strongest for mergers and acquisitions in the UK since 2015, with more than $229bn (£169bn) of deals completed, according to Bloomberg data, and three more months remaining.
The deal to take private Morrisons, just months after Asda was snapped up by the Issa brothers for £6.8bn, has reignited private interest in supermarkets due to their low share prices, healthy cash generation and large freehold property portfolios.
Andrew Porteous, an analyst at HSBC, said: “There is further to go in the market’s understanding of the sector's free cash flow and its confidence in the sustainability of free cash generation.”
Tony Shiret, an equities analyst at Panmure Gordon, added: “The thing that struck me about the Asda deal was the availability of very cheap, mezzanine finance. The coupons on the debts are so much lower than they were historically, so I think that theoretically puts a whole bunch of stuff in range, but it depends what’s got assets and what doesn’t.”
Sainsbury’s and Marks & Spencer could be next in the firing line for a takeover swoop, analysts have said.
Sainsbury’s has already been the subject of bid speculation after Daniel Kretinsky, a billionaire known as the Czech sphinx, built a 10pc stake earlier this year.
Mr Shiret said: “Obviously Sainsbury’s [could be a target], I would think Tesco would be too big, M&S could be easily looked at, it isn't big. But anyone coming in would have the same problem that management has got in terms of turning it around.”
Experts have suggested that Fortress is in prime position to make a grab for another supermarket, given its recent preparations for a takeover of Morrisons.
One City source said: “Fortress is here and they are well-funded and there is something that will happen there for sure.”
Shore Capital’s Mr Black added: “Fortress put a lot of resources into this bid. It employed a lot of advisers, raised a lot of financing and undertook a lot of legal advice. It sounds like they might be active further down the line. It will turn the Sainsbury's chatter up a notch.”
Shareholders will vote on CD&R’s £7bn offer for Morrisons on October 19. The 287p-a-share bid is a 61pc premium to the chain’s share price in June when CD&R first approached the supermarket.
M&G, a major Morrisons' shareholder which previously criticised a lower bid from Fortress, said CD&R's offer was “a good outcome for shareholders” and that it was likely to vote in favour of it.
Rupert Krefting, M&G's head of corporate finance and stewardship, said: “It’s a great improvement on where we started, it’s all worked out quite well.”
Sir Terry is set to take over from Andrew Higginson as chairman of Morrisons once the deal completes, marking the first time he has helmed a British grocer in a decade.
