The US private equity owner of Morrisons has raised £220m from the sale and leaseback of seven warehouses amid concerns over the UK supermarket group’s debt mountain.
Morrisons has struggled since Clayton, Dubilier & Rice took it over in a £7bn buyout just over a year ago. Takings sank nearly 5% in the three months to the end of November, according to the latest data from the market research group Kantar, despite grocery price inflation of 14%.
After the takeover, Morrisons’ debt pile more than doubled, from £3.2bn in January 2021 to £6.8bn a year later, according to the credit rating agency Moody’s. The cost of that debt is thought to have soared since then, with Moody’s estimating that a one-percentage-point increase in interest rates would cost its new owners an additional £30m in fees.
Last week, the debt ratings agency Fitch downgraded its view of Morrisons’ debt position amid “weaker profitability and free cash flow (FCF) generation, and higher interest costs on floating-rate debt”. It said that Morrisons had recently taken steps to help its most cash-strapped customers and fight off competition for their trade from discounters.
However, it said Morrisons had lost more market share than its peers, with bigger rival Asda gaining fresh impetus while it had been forced to put up prices more quickly, partly as a result of its heavy use of its own food packing and processing plants, which meant it could pass fewer costs on to suppliers.
Morrisons said it planned to use the proceeds of the warehouse deal with the asset management firm Intermediate Capital Group to “finance further investment” rather than pay down debt.
The company is expected to pump cash into price cuts and convert almost 1,000 of the McColl’s convenience stores that it took control of earlier this year to its Morrisons Daily format.
Jo Goff, the chief financial officer of Morrisons, said: “We continue to invest in our strategy of becoming a broader, stronger, more popular and more accessible business, and this transaction will help to finance further investment.
“The acquisition of McColl’s earlier this year gave us a leading position in the UK convenience market, and next year we plan to open a further five supermarkets across the UK, and to invest further in our manufacturing operations.”
Morrisons is searching for a way to fight back against heavy competition from discounters Aldi and Lidl, having lost its spot as the UK’s fourth-largest grocer to Aldi.
Profits slumped by 50% this summer as it battled “unprecedented inflationary pressures” at its in-house food-processing arm. Sales for the period rose by 4.5% to almost £4.8bn, but were down by just over 3% once new store openings were excluded, at a time when grocery inflation was running at more than 7%.