A major City of London investor has spoken out against the possible private equity takeover of Morrisons (MRW.L).
A top fund manager at Legal & General Investment Management (LGIM) has sounded the alarm over the private equity bidding war for Britain's fourth largest supermarket, saying bidders could be interested for the "wrong reasons".
"If an acquirer makes strong returns this should come from making the company a better business," Andrew Koch, a senior fund manager at the UK's largest asset manager, said in a statement reported by the Guardian. "It should not come from buying its property portfolio too cheaply, levering the company up with debt, and potentially reducing the tax paid to the exchequer."
The public intervention comes amid growing unease around private equity interest in UK companies. James Henderson, a fund manager at Janus Henderson, recently told the Financial Times that private equity groups were "raiding" Britain to cherry pick the best companies at knock-down prices. The Daily Mail, Britain's best-selling newspaper, has started a public campaign against private equity "plundering".
Brexit and the COVID-19 have depressed share prices and left many UK companies undervalued. Private equity firms are flush with cash and many are now spotting bargains in the UK market. Globally, private equity dealmaking hit record levels in the first six months of 2021, according to the Financial Times.
Asda has already fallen into private equity hands and now Morrisons is being circled. Clayton, Dubilier & Rice (CD&R), Apollo and a group of firms led by Fortress have all expressed an interest in buying the supermarket chain in recent weeks.
On Saturday Morrisons said it had agreed a £6.3bn takeover by a consortium led by Fortress Investment Group. The approach sent Morrisons' stock soaring by more than 10% on Monday as investors speculated that other bids could still come in.
Morrisons is seen as an attractive acquisition target because it owns a large amount of property in the UK, which can be borrowed against. The supermarket chain owns around 80% of its near 500 stores.
Private equity firms typically like to leverage up their investments and use the funds either to invest in the core business or to take out as dividends. While the strategy can be profitable for private equity owners, the large debt piles can prove costly for businesses in the long run.
LGIM's Koch warned that the acquisition should be avoided if it is merely being used to take advantage of an undervalued property portfolio, to increase its debt load or to cut tax bills.
"As responsible stewards of our clients capital, it is important that the company isn’t taken over for the wrong reasons," Koch said.
LGIM owns a 2.8% chunk of Morrisons, making it a top 10 investor.
Watch: Morrisons supermarket agrees to £6.3bn takeover bid