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Morrisons - bidding war ends with 287p per share offer

Sophie Lund-Yates, Equity Analyst | 4 October 2021 | A A A
Morrisons - bidding war ends with 287p per share offer

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Morrison (Wm) Supermarkets Ordinary 10p

Sell: 286.50 | Buy: 286.50 | Change 0.10 (0.03%)
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Following an auction on 2 October, CD&R have upped their offer price for Morrisons from 285p to 287p per share. That trumps the final offer from Fortress which came in at 286p.

The Morrisons board is recommending that shareholders accept CD&R's offer, which values Morrisons at £7.1bn and is a 61% premium to the share price before any offers were made. No decision is final until a shareholder vote is held in mid-October.

The shares fell 3.7% following the announcement.

View the latest Morrisons share price and how to deal

Our view

The bidding war for Morrisons is over, with CD&R's final offer of 287p per share trumping Fortress. The Board continues to recommend shareholders pick CD&R to take over the company. The higher offer values Morrisons at £7.1bn, and is a 61% premium to the share price before any offers were made. The decision is in the hands of shareholders now, with nothing final until a vote's held in a couple of weeks.

Investors should beware of counting chickens before they've hatched though. Staff have voiced concerns about job losses, and until any deal is binding, it's important not to lose sight of the existing long-term 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 Amazon partnership is especially exciting, with the relationship cutting both ways. Amazon provides a same-day delivery service for Morrisons groceries, and Morrisons also supplies Amazon's payment-less stores with fresh produce.

The pandemic's acted as a catalyst for the shift to online shopping. Crucially, the in-house morrisons.com online business is now profitable. The question is whether 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 growth slow 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.

It's unlikely pricing pressure is going to ease. We've been encouraged by recent market share gains, but we'd like proof Morrison's popularity can be sustained.

The Wholesale business 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 - but these are on the backburner given the possibility of an imminent buy-out, which would see shareholders receive a premium share-price compared to pre-deal talks.

Ultimately, Morrisons' underdog status means it could offer exciting growth opportunities. The price to earnings ratio has increased to an above-average 20, largely because of excitement around the prospect of a buyout.

Morrison key facts

  • Price/earnings ratio: 20.0
  • Ten year average Price/earnings ratio: 14.3
  • Prospective dividend yield (next 12 months): 3.1%

All ratios are sourced from Refinitiv. 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 half results (9 September 2021)

The group's reiterated it expects underlying full year pre-tax profit to be higher than the £431m achieved last year, excluding repaid business rate relief. That comes as total revenue rose 3.7% to £9.1bn in the first half. However, on a like-for-like basis, excluding fuel, sales fell 0.3%. Underlying pre-tax profit of £167m fell 37.1%, because of Covid costs and lost sales from cafes, fuel and food-on-the-go.

Given the existing offers from CD&R and Fortress, no interim dividend will be paid.

Retail like-for-like (LFL) sales fell 1.4%, reflecting the strong sales seen during the earlier stages of the pandemic this time last year. Café closures and reduced demand for takeaway snacks also had an impact. Wholesale LFLs rose 1.0%, and 25 McColl's stores were converted to Morrisons Daily in the period. Compared to pre-pandemic levels, group LFLs are up 8.4%.

The group's partnership with Amazon continued to progress, with Morrisons saying: ''sales through the 'Morrisons on Amazon' home delivery channel have remained very strong even as lockdown restrictions have eased''. This same-day delivery option is available in 60 towns and cities, and the group has also started supplying all Amazon Fresh UK stores.

There was a free cash inflow of £266m, compared to an outflow of £228m last year. Net debt was £3.0bn, down slightly on £3.2bn at the end of last year.

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.