Fortress to Buy Morrison for $8.7 Billion, May Start Bidding War

(Bloomberg) -- An investor consortium led by Fortress Investment Group agreed to buy Wm Morrison Supermarkets Plc for about 6.3 billion pounds ($8.7 billion), potentially triggering a bidding war for one of the U.K.'s largest grocers.

The group has been in talks with Morrison since May and made five offers during the period, people familiar with the matter said. The supermarket chain said in June that it rejected a 5.5 billion-pound offer from Clayton Dubilier & Rice.

As essential businesses, grocery chains weathered the past year's pandemic better than other retailers, and investors are seeking to capitalize on the stores' improving fortunes as lockdowns end.

In a statement on Saturday Fortress, a SoftBank Group Corp. subsidiary, said the group pledged to stand by recent pay increases at Morrison as well as pensions and arrangements with suppliers. It also acknowledged the company's role in the security of the U.K.'s food supply.

The Labour Party on Saturday demanded close scrutiny of the potential foreign private equity acquisition of a 122-year-old chain well known across Northern England and headquartered in Bradford, West Yorkshire.

“Overseas investors play a major and positive role in stimulating economic growth in every part of the U.K.,” the government said in a statement. “In most cases, it is right that mergers are treated as a commercial matter for the parties involved.” Business Secretary Kwasi Kwarteng is monitoring the proposed transaction “closely,” his office said.

Unions representing Morrison workers also called for urgent talks. Morrison, the U.K.'s fourth-largest supermarket chain, has some 110,000 employees.

Morrison hasn't yet spoken to the government about the Fortress deal but intends to start the process now, a person familiar said.

Others in the Fortress consortium include the Canada Pension Plan Investment Board and the real estate arm of Koch Industries Inc., the largest privately held company in the U.S., run by the Koch family of prominent conservative political donors.

“The Morrison directors believe that the offer represents a fair and recommendable price for shareholders which recognizes Morrison's future prospects,” the grocer's chairman, Andrew Higginson, said in a statement.

Within a highly competitive, low-margin market, U.K. grocery stores are grappling with the rise of online shopping as well as challenges from German discounters Aldi and Lidl.

42% Premium

For each Morrison share, holders will receive 252 pence in cash and a 2 pence special dividend, according to the proposal. That is still below the 270 pence per share range some of Morrison's top investors had been asking for to engage with CD&R, so there is potential for a counter-bid. Officials with CD&R declined to comment on Saturday.

The offer represents a premium of about 42% to the closing price of 178 pence per Morrison share as of June 18, the final day of trading before the start of the offer period, and a 41% premium to the volume-weighted average closing price of 180 pence per share for the three-month period ended June 18.

Fortress will also assume about 3.2 billion pounds of Morrison debt as part of the deal, the people said.

Morrisons' real estate assets with be closely eyed as the sale moves forward. The firm said it doesn't plan “material sale-and-leasebacks” of its nearly 500 stores, some 85% of which they own freehold.

Driven by the recent interest, Morrison closed Friday at 239.8 pence per share, above CD&R's 230 pence-a-share bid.

Because they were allowed to stay open as essential retailers, Morrison and competing U.K. supermarkets including Tesco Plc and J Sainsbury Plc fared better than other stores.

Private equity investors have targeted the sector, with Britain's third-largest grocer, Asda Group Ltd., taken over by TDR Capital and the Issa brothers in a 6.5 billion-pound deal. Walmart Inc., the U.S. retailer which owned Asda since 1999, retains a minority stake. The Asda transaction came two years after regulators blocked Walmart's a previous attempt to sell the business to the U.K. grocer's bigger rival, Sainsbury.

‘Indifferent Approach'

The Labour Party's shadow minister for business and consumers called for legally binding commitments to protect the Morrison workforce and its pension scheme in the face of an “indifferent approach” by the U.K. government.

“Ministers must also ensure legal promises are made about the integrity and future of the business, including any impact on the supply chain and distribution centers,” MP Seema Malhotra said in a statement.

Fortress operates as an independent investment firm and its owner SoftBank, which has made some significant investments in the U.K. in recent years, wasn't involved in the Morrison negotiations, the people said.

HSBC and RBC Capital are advising Fortress and also providing debt funding for the deal.

Fortress' other retail and petrol forecourt investments include Albertsons, Circle K and Fresh & Easy in the U.S., and Majestic wine stores in the U.K. The firm said it intends for Morrison to continue to operate as a standalone business with its head office remaining in Bradford, and led by its current management team

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