LONDON, Oct 2 (Reuters Breakingviews) – British shoppers are getting used to making do with substitutes when supply-chain woes make their first choice unavailable. SoftBank Group’s (9984.T) Fortress Investment, which led the losing consortium for grocery chain Wm Morrison Supermarkets (MRW.L), is having to do the same. It may not regret the outcome.
Fortress bid 286 pence a share for the country’s fourth biggest supermarket chain, just shy of the winning 287 pence bid from Clayton, Dubilier & Rice that valued the company’s equity at 7 billion pounds. That’s only 2 pence higher than CD&R’s offer in August, raising the question of whether Saturday’s auction was worth the fuss.
The victorious bid was around 60% higher than Morrisons’ worth before the acquisition saga kicked off. Yet shareholders may still be disappointed: on Friday Morrisons stock closed at 297 pence. For its part, Fortress at least knows it didn’t overpay. And if it still thinks British supermarkets are a recipe for decent returns, it has a fallback option. Britain’s billionaire Issa brothers and private equity group TDR Capital snapped up Asda a year ago and, at an equity value of 19 billion pounds, market leader Tesco (TSCO.L) is probably on the chunky side. That leaves perennial buyout target J Sainsbury (SBRY.L).
Unlike Morrisons, the 7 billion pound grocer doesn’t produce some of its own food and has a smaller freehold property portfolio. But it has a bigger market share and better online offering. And even with the same buyout premium, it could generate passable returns.
Assume Fortress improves Sainsbury’s EBITDA margin a notch to 8%, manages to grow revenue 2% a year and finances a third of its acquisition with equity, as per CD&R’s Morrisons bid. In five years’ time, after using a third of the EBITDA generated to pay down debt, the internal rate of return would be 18%, according to Breakingviews calculations based on an 8.7 times EBITDA exit multiple, the same as its entry.
Luckily for Fortress, which has $54 billion under management, Sainsbury’s share price has slipped back from the 342 pence peak scaled in August when takeover speculation picked up. Unluckily, Asda losers Apollo Global Management (APO.N) and Lone Star may also be interested. Another UK supermarket auction could be around the corner.
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– U.S. private equity group Clayton, Dubilier & Rice on Oct. 2 won an auction for Britain’s Wm Morrison Supermarkets with a 7 billion pound bid, narrowly beating an offer from a consortium led by SoftBank Group-owned Fortress Investment.
– CD&R had offered 287 pence per share, just 1 pence more than the Fortress consortium, the Takeover Panel, which governs M&A in Britain, said in a statement.
– CD&R’s offer was slightly higher than the 285 pence a share offer recommended by Morrisons’ board in August.
Editing by Ed Cropley and Oliver Taslic
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