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Morrison - rejects takeover bid

Sophie Lund-Yates, Equity Analyst | 21 June 2021 | A A A
Morrison - rejects takeover bid

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Morrison (Wm) Supermarkets Ordinary 10p

Sell: 286.65 | Buy: 286.65 | Change 0.00 (0.00%)
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Morrison has rejected a cash offer from Clayton, Dubilier & Rice of 230p per share. The offer also meant Morrison shareholders would receive the previously announced final dividend of 5.11p per share.

The group decided that "the proposal significantly undervalued Morrisons and its future prospects", and rejected the offer on 17 June 2021.

Clayton, Dubilier & Rice has until 17 July 2021 to announce a firm intention to make another offer, or that it doesn't intend to make an offer. This deadline could be extended, but is at the discretion of the Panel on Takeovers and Mergers.

The shares rose 30.7% following the announcement.

View the latest Morrisons share price and how to deal

Our View

Morrison has rejected this takeover bid, but there could be others. US private equity firm Clayton, Dubilier & Rice could come back with a better offer, or it could spur others to make bids of their own. The tough conditions brought on by Covid means Morrison's share price is lower than pre-pandemic times. That means it could be a more attractive takeover target.

The rejected offer valued Morrison shares at a 29% premium to their closing price before the announcement. But we don't know if, or when, another offer will be made - or what it might mean for existing shareholders. So it's important to remember the underlying investment case.

Skyrocketing online sales are Morrison's biggest opportunity. Last quarter, digital sales (which includes morrisons.com and Morrisons on Amazon) were up 113%. At the last count, capacity was up fivefold. This enormous growth is largely because Morrison's online business is smaller than rivals, which leaves room for more exceptional growth.

The long-term growth lever has been accelerated because the pandemic's acted as a catalyst for the shift to online shopping. Crucially, the online business is now profitable. The question now is if Morrison's can keep a firm grasp on that momentum, or if it left digital investment too late and risks being permanently outshone by bigger rivals.

The picture in the core store business is a little mixed. We're starting to see sales slow down quite significantly. That's largely because we're lapping earlier stages of the pandemic, but the extent of the slowdown could also be a sign of difficulty. Sales were lacklustre before the crisis.

Morrison's is focussed on a volume-led approach, as it continues to cut prices. This tactic requires a high number of sales, or the already thin margins could suffer. As shopping habits continue to normalise, this could put a tight lid on profits.

With the recent sale of Asda and an all-round uber-competitive environment, it's unlikely pricing pressure is going to ease. We've been encouraged by recent market share gains, and the impressive boost from higher food-on-the-go sales, but we'd like proof Morrison's popularity can be sustained.

The Wholesale business, which has been quietly expanding, offers an alternative source of revenue, helping cushion some of the blows in general retail. And the group has prudently managed finances - most stores are owned, not leased, helping the balance sheet. In the past this has meant special dividends for shareholders, and these returns to shareholders could be back on the menu at the half year. No dividend is ever guaranteed.

Ultimately, we're impressed by the progress Morrison's is making. Its underdog status means it could offer exciting growth opportunities, especially as the price to earnings ratio is lower than the long-term average. Although this also probably reflects the market's concerns about Morrison's less competitive position. We think Morrison has potential, but investors need to accept some extra risk.

Morrison key facts

  • Forward P/E ratio: 12.4
  • 10 year average forward P/E ratio: 14.1
  • Prospective yield (next twelve months): 5.0%

Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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First quarter trading details (11 May 2021)

First quarter like-for-like (LFL) sales, excluding fuel, rose 2.7%, compared to 5.7% this time last year, and 9.0% last quarter. The slowdown partly reflects difficult comparisons, because of previous lockdowns and the start of the pandemic.

The group is on track to deliver underlying pre-tax profit of over £431m for the full year.

Morrison said it plans to "refresh" its dividend and capital allocation plans, and will give more details at half year results in September.

Total sales, excluding fuel, rose 3.3%, with 0.5% coming from new space. Performance was boosted by "successful" Mother's Day and Easter trading. Food-to-go sales have increased, and Morrison said people are cooking at home more. Morrison decided not to pass on higher commodity and freight costs to customers.

Online sales, which includes morrisons.com and Morrisons on Amazon, rose 113% in the period.

Wholesale contributed 1.1% to group LFLs, which is equivalent to a 21% increase in Wholesale LFL. That reflects the previously announced deal to supply a further 230 McColl's stores, and 25 McColl's stores were converted to Morrisons Daily.

Including fuel sales, group like-for-like (LFL) sales were up 4.7%, which is much better than last year, and up on last quarter's 0.7% growth. Fuel sales are almost back at pre-pandemic levels.

During the quarter, Morrison incurred £27m of Covid-related costs, which was in line with expectations and largely related to staff absence.

Looking ahead to the full year, the group plans to open two new stores, in Kirkby and Chelmsford, plus temporary replacement stores in Camden and Little Clacton. As previously guided, net debt's expected to be no higher than 2.4 times cash profits.

Find out more about Morrison shares including how to invest

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.