Asset Allocation & Fund Positioning, Copley Fund Research

Steven Holden

Asset Allocation & Fund Positioning

Copley Fund Research

Copley Fund Research provide research and data on asset allocation among Global and Emerging Market equity funds.  The analysis details absolute and relative positioning across countries, sectors and industries together with highly granular data on single stock and single fund allocations.  The data is updated monthly with time series going back to January 2011.

Global Research - Analysis of 165 prominent Global equity funds, combined AUM $335bn
GEM Research - Analysis of 127 prominent global EM equity funds, combined AUM $250bn

Asset Allocation - Global and GEM Equity

Equity Bottom-Up

<ul>
<li>The percentage of funds invested in Diageo and the average weight in UK portfolios have been on a downward trajectory since reaching a peak in late 2021.</li>
<li>Rotation within the Consumer Staples sector sees BATS and Reckitt's joining Diageo, whilst Tesco, Britvic and Cranswisk make sustained gains.</li>
<li>Significant exits from Axa Framlington, abrdn, and PrivilEdge have reduced average fund exposure to its lowest point since 2017</li>
</ul>


The percentage of funds invested in Diageo and the average weight in UK portfolios have been on a downward trajectory since reaching a peak in late 2021.
Rotation within the Consumer Staples sector sees BATS and Reckitt's joining Diageo, whilst Tesco, Britvic and Cranswisk make sustained gains.
Significant exits from Axa Framlington, abrdn, and PrivilEdge have reduced average fund exposure to its lowest point since 2017


Diageo PLC: Slide Continues as UK Funds Cut Stakes

European Event-Driven Analyst

Jesus Rodriguez Aguilar

Event-Driven

At the awaited auction for <a href="https://www.smartkarma.com/entities/wm-morrison-supermarkets-plc" target="_blank" data-smartkarma-citation="entities:22052:1" rel="noopener">Wm Morrison Supermarkets (MRW LN)</a>, CD&amp;R increased its bid to 287p against a bid of 286p made by Fortress. CD&amp;R took its prey. Fortress, which had preemptively struck (<a href="https://www.smartkarma.com/insights/fortress-morrisons-272p-pre-emptive-strike" target="_blank" data-smartkarma-citation="insights:55791" rel="noopener">Fortress/Morrisons: 272p Pre-Emptive Strike</a>) saved face and CD&amp;R won by increasing its stretched offer by just 0.7% (c. £48 mn). Fortress could have withdrawn just as Carlyle did in the tussle with Philip Morris for <a href="https://www.smartkarma.com/entities/vectura-group-plc" target="_blank" data-smartkarma-citation="entities:22201:1" rel="noopener">Vectura (VEC LN)</a>, but preferred to make its rival pay a bit extra.
The consideration represents an implied equity value of £7,032 mn and an implied EV of £10,113 mn. This also represents 9.1x EV/Fwd EBITDA and 20.4 Fwd P/E.
The 61% premium vs. closing price prior to commencement of the offer period highlights the extreme lengths PE firms are willing to go to spend its dry powder, amid a global deal frenzy.
The only approvals required by CD&amp;R are the approval by the requisite majority of scheme shareholders at the Court Meeting and Morrisons shareholders at the General Meeting and sanction of the Scheme by the Court.
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According to my calculations, the winning bid should achieve an 11.8% IRR by year 8. Assumptions are an exit multiple of 8.5x (this would be a substantial re-rating vs. the previously considered 7.9x), cutting capex by a fifth, an EBITDA margin improvement to 6.3% (a c. 20 bps gain vs. Capital IQ consensus forecasts, with the necessary caveat that such a move may drive customers out of the stores and therefore lead to a loss of market share). 
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Gross spread is 0.5%. The deal will complete. Time to surrender the shares.

At the awaited auction for Wm Morrison Supermarkets (MRW LN), CD&amp;R increased its bid to 287p against a bid of 286p made by Fortress. CD&amp;R took its prey. Fortress, which had preemptively struck (Fortress/Morrisons: 272p Pre-Emptive Strike) saved face and CD&amp;R won by increasing its stretched offer by just 0.7% (c. £48 mn). Fortress could have withdrawn just as Carlyle did in the tussle with Philip Morris for Vectura (VEC LN), but preferred to make its rival pay a bit extra.
The consideration represents an implied equity value of £7,032 mn and an implied EV of £10,113 mn. This also represents 9.1x EV/Fwd EBITDA and 20.4 Fwd P/E.
The 61% premium vs. closing price prior to commencement of the offer period highlights the extreme lengths PE firms are willing to go to spend its dry powder, amid a global deal frenzy.
The only approvals required by CD&amp;R are the approval by the requisite majority of scheme shareholders at the Court Meeting and Morrisons shareholders at the General Meeting and sanction of the Scheme by the Court.






According to my calculations, the winning bid should achieve an 11.8% IRR by year 8. Assumptions are an exit multiple of 8.5x (this would be a substantial re-rating vs. the previously considered 7.9x), cutting capex by a fifth, an EBITDA margin improvement to 6.3% (a c. 20 bps gain vs. Capital IQ consensus forecasts, with the necessary caveat that such a move may drive customers out of the stores and therefore lead to a loss of market share). 






Gross spread is 0.5%. The deal will complete. Time to surrender the shares.

Index Rebalance

In my last insight about <a href="https://www.smartkarma.com/entities/wm-morrison-supermarkets-plc" target="_blank" data-smartkarma-citation="entities:22052:1" rel="noopener">Wm Morrison Supermarkets (MRW LN)</a> (see <a href="https://www.smartkarma.com/insights/fortress-morrisons-272p-pre-emptive-strike" target="_blank" data-smartkarma-citation="insights:55791" rel="noopener">Fortress/Morrisons: 272p Pre-Emptive Strike</a> ), I mentioned that a bid from CD&amp;R could come at 285p. The bid came, recommended, at 285p and the shares closed at 291p on 20 August.
Now shares are trading at around 291p,  on expectations of a raised offer by Fortress and  expectations that Morrisons may enter the FTSE 100, which should support the shares and drive them higher, as per per fellow insight provider Brian Freitas (see <a href="https://www.smartkarma.com/insights/ftse100-index-rebalance-preview-takeover-names-in-focus" target="_blank" data-smartkarma-citation="insights:56622" rel="noopener">FTSE100 Index Rebalance Preview: Takeover Names in Focus</a>). Brian recommends buying the stock at 285p or slightly higher.
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Unsurprisingly, private equity has first directed its raid towards Morrisons, because it can take higher debt than competitors:
<ul>
<li>It has the highest ownership of its properties at 87% vs. c. 57% for <a href="https://www.smartkarma.com/entities/j-sainsbury-plc" target="_blank" data-smartkarma-citation="entities:22130:1" rel="noopener">J Sainsbury PLC (SBRY LN)</a>  and c. 58% for <a href="https://www.smartkarma.com/entities/tesco-plc" target="_blank" data-smartkarma-citation="entities:22187:1" rel="noopener">Tesco PLC (TSCO LN)</a>.</li>
<li>Its FY2023e gearing of 2.3x including operating leases, is the lowest in the industry and it has a £682 million pension surplus.</li>
<li>Its 2023e FCF will reach c. £447 mn (Capital IQ consensus).</li>
</ul>
As already mentioned, the 285p counteroffer by CD&amp;R would achieve and IRR of 12%, and would rely on a high exit multiple of 8.5x (this would mean a substantial re-rating vs. the previously considered 7.9x), cutting in Capex by a fifth, an EBITDA margin improvement to 6.3% (a c. 20 bps gain vs. Capital IQ consensus forecasts, with the necessary caveat that such a move may drive customers out of the stores and therefore loss of market share). Obtaining a higher IRR would involve substantial sale&amp;leaseback.
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None of the bidding parties has declared its offer as final and another bid could come from Fortress. If that happened, I believe the Panel would set up an orderly auction process. I change my recommendation to long MRW LN. Downside is limited to 2.1%.
The focus will turn now to <a href="https://www.smartkarma.com/entities/j-sainsbury-plc" target="_blank" data-smartkarma-citation="entities:22130:1" rel="noopener">J Sainsbury PLC (SBRY LN)</a>.

In my last insight about Wm Morrison Supermarkets (MRW LN) (see Fortress/Morrisons: 272p Pre-Emptive Strike ), I mentioned that a bid from CD&amp;R could come at 285p. The bid came, recommended, at 285p and the shares closed at 291p on 20 August.
Now shares are trading at around 291p,  on expectations of a raised offer by Fortress and  expectations that Morrisons may enter the FTSE 100, which should support the shares and drive them higher, as per per fellow insight provider Brian Freitas (see FTSE100 Index Rebalance Preview: Takeover Names in Focus). Brian recommends buying the stock at 285p or slightly higher.

Unsurprisingly, private equity has first directed its raid towards Morrisons, because it can take higher debt than competitors:

It has the highest ownership of its properties at 87% vs. c. 57% for J Sainsbury PLC (SBRY LN)  and c. 58% for Tesco PLC (TSCO LN).
Its FY2023e gearing of 2.3x including operating leases, is the lowest in the industry and it has a £682 million pension surplus.
Its 2023e FCF will reach c. £447 mn (Capital IQ consensus).

As already mentioned, the 285p counteroffer by CD&amp;R would achieve and IRR of 12%, and would rely on a high exit multiple of 8.5x (this would mean a substantial re-rating vs. the previously considered 7.9x), cutting in Capex by a fifth, an EBITDA margin improvement to 6.3% (a c. 20 bps gain vs. Capital IQ consensus forecasts, with the necessary caveat that such a move may drive customers out of the stores and therefore loss of market share). Obtaining a higher IRR would involve substantial sale&amp;leaseback.

None of the bidding parties has declared its offer as final and another bid could come from Fortress. If that happened, I believe the Panel would set up an orderly auction process. I change my recommendation to long MRW LN. Downside is limited to 2.1%.
The focus will turn now to J Sainsbury PLC (SBRY LN).

CD&R Leading the Bid War for Morrisons with a Recommended Offer

The Board of <a href="https://www.smartkarma.com/entities/wm-morrison-supermarkets-plc" target="_blank" data-smartkarma-citation="entities:22052:1" rel="noopener">Wm Morrison Supermarkets (MRW LN)</a> has recommended a 254p cash offer by a consortium led by Fortress (to be effected by a scheme of arrangement). This is a 10.4% improvement vs. CD&amp;R's last possible offer, which was rejected by the Board.
This offer represents 8.5x EV/Fwd EBITDA and 17.9x Fwd P/E. This is below the 9.7x EV/EBITDA median of former deals in the sector. The planned sale values Morrisons shares at £6.3 bn, and the funds will also take on £3.2 bn of debt. The deal will be financed with £5.75 billion in debt, underwritten by HSBC and the Royal Bank of Canada.
Morrisons reported in March that its annual profit had been cut in half, largely due to costs incurred during the Covid-19 pandemic, but predicted a rebound in fiscal 2021-22. Morrison has some 500 stores, 58 Daily kiosks, 338 petrol stations, and more than 118,000 employees in the UK, but 2020 saw its shares fall off the selective FTSE-100, making it more vulnerable to acquisitions. Morrisons remains a unique asset for its market share (4th largest grocer in the UK) and portfolio of freehold property (book value of £5.8bn).
The offer from the Fortress consortium is to a large extent based on fuel and property (based on Fortress capabilities in grocery and petrol stations and KREI experience in real estate), potential new stores/investments in existing ones, and review of the property portfolio (although as mentioned before in the Insight), the consortium "does not anticipate engaging in any material store sale and leaseback transaction".
As for interloper risk, Reuters notes that a formal offer from CD&amp;R for Morrisons could involve Terry Leahy, the former CEO of Tesco, who is a senior advisor to CD&amp;R. CD&amp;R has until 17 July to make a firm offer. According to S&amp;P MI, Apollo<a href="https://platform.marketintelligence.spglobal.com/web/client?auth=inherit#company/profile?KeyProductLinkType=2&amp;id=4204256" target="_blank" rel="noopener"></a> is also looking to make an offer for Morrisons. 
Last week, JO Hambro, a top ten shareholder, said that any suitor in the group should offer about 270p/share, or £6.5 bn. This would be 6.3% higher than Fortress's bid. According to my calculations, such an offer would rely on improving EBITDA margins and would reach an IRR of 11% by year 8. Initial net debt/EBITDA would go over 6x and would diminish to c. 4x by year 8. Based on comparable companies, taking the implied median value across multiples, would give a valuation for Morrison of 290p.
Expect an improved offer to be in the range 270-280p. Recommendation is long MRW LN. Risk is that there will not be a bidding war. On 6 July Morrisons closed at 267p (with c. £33.6 mn traded). Gross spread to Fortress's offer is -5.1%.

The Board of Wm Morrison Supermarkets (MRW LN) has recommended a 254p cash offer by a consortium led by Fortress (to be effected by a scheme of arrangement). This is a 10.4% improvement vs. CD&amp;R's last possible offer, which was rejected by the Board.
This offer represents 8.5x EV/Fwd EBITDA and 17.9x Fwd P/E. This is below the 9.7x EV/EBITDA median of former deals in the sector. The planned sale values Morrisons shares at £6.3 bn, and the funds will also take on £3.2 bn of debt. The deal will be financed with £5.75 billion in debt, underwritten by HSBC and the Royal Bank of Canada.
Morrisons reported in March that its annual profit had been cut in half, largely due to costs incurred during the Covid-19 pandemic, but predicted a rebound in fiscal 2021-22. Morrison has some 500 stores, 58 Daily kiosks, 338 petrol stations, and more than 118,000 employees in the UK, but 2020 saw its shares fall off the selective FTSE-100, making it more vulnerable to acquisitions. Morrisons remains a unique asset for its market share (4th largest grocer in the UK) and portfolio of freehold property (book value of £5.8bn).
The offer from the Fortress consortium is to a large extent based on fuel and property (based on Fortress capabilities in grocery and petrol stations and KREI experience in real estate), potential new stores/investments in existing ones, and review of the property portfolio (although as mentioned before in the Insight), the consortium "does not anticipate engaging in any material store sale and leaseback transaction".
As for interloper risk, Reuters notes that a formal offer from CD&amp;R for Morrisons could involve Terry Leahy, the former CEO of Tesco, who is a senior advisor to CD&amp;R. CD&amp;R has until 17 July to make a firm offer. According to S&amp;P MI, Apollo is also looking to make an offer for Morrisons. 
Last week, JO Hambro, a top ten shareholder, said that any suitor in the group should offer about 270p/share, or £6.5 bn. This would be 6.3% higher than Fortress's bid. According to my calculations, such an offer would rely on improving EBITDA margins and would reach an IRR of 11% by year 8. Initial net debt/EBITDA would go over 6x and would diminish to c. 4x by year 8. Based on comparable companies, taking the implied median value across multiples, would give a valuation for Morrison of 290p.
Expect an improved offer to be in the range 270-280p. Recommendation is long MRW LN. Risk is that there will not be a bidding war. On 6 July Morrisons closed at 267p (with c. £33.6 mn traded). Gross spread to Fortress's offer is -5.1%. 

Fortress's Recommended Cash Offer Trumps CD&R

President, Vision Research

Robert C Prather Jr

President

Vision Research

Vision Research was formed in 2004 with the vision of generating the best possible fundamental analysis and investment research for smid cap US equities. In 2008, we broadened our coverage to include mid/large cap US stocks.  After researching a  few ideas outside the US each year for a number of years, we launched a dedicated non-US equity product at the end of 2015.  This was followed by the introduction of a product focused on IPOs in mid-2017.

Fundamental Insight

A company reminiscent more of a value trap than value investment with the shift to online being margin dilutive, market share losses, renewed competitive intensity, and recent grocer product price cuts.

A company reminiscent more of a value trap than value investment with the shift to online being margin dilutive, market share losses, renewed competitive intensity, and recent grocer product price cuts.  

J Sainsbury PLC(SBRY LN): Is This UK Grocer a Value Trap/Short?

United Kingdom

Sainsbury's is a leading UK multi-channel retailer offering groceries, general merchandise, and clothing. The company operates supermarkets, convenience stores, and online platforms, alongside financial services through Sainsbury's Bank and general merchandise through brands like Argos and Habitat. It was founded in 1869 and is headquartered in London, United Kingdom.

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Sainsbury's (SBRY LN)

Diageo PLC: Slide Continues as UK Funds Cut Stakes

UK fund managers are continuing to reduce their positions in Diageo. The percentage of funds invested in Diageo and the average weight in UK...

Steven Holden

CD&R/Morrisons: Final Offer and Spread

The winning bid should achieve an 11.8% IRR by year 8 (leverage of 4.1x net debt/EBITDA). Gross spread is 0.5%. The deal will complete. Time to...

Jesus Rodriguez Aguilar

CD&R Leading the Bid War for Morrisons with a Recommended Offer

None of the bidders has declared its offer final. Another bid could come from Fortress and the Panel would set up an orderly auction. Further...

Jesus Rodriguez Aguilar

Fortress's Recommended Cash Offer Trumps CD&R

Expect an improved offer to be in the range 270-280p. Long MRW LN. Risk is that there will not be a bidding war. On 6 July there were c. £33.6 mn...

Jesus Rodriguez Aguilar

J Sainsbury PLC(SBRY LN): Is This UK Grocer a Value Trap/Short?

Market share losses, difficult comps, increasing competition from online and discounters, and optimistic estimates and premium valuations on top of...

Robert C Prather Jr

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