European Event-Driven Analyst

Jesus Rodriguez Aguilar

Event-Driven

On Friday 6 August, Morrison agreed to an improved offer from the Fortress consortium that valued it at £6.7 billion. Under the offer, accepting Morrison shareholders will get 272p/share, which represents a 7% premium to the original Fortress offer. Morrison's EGM will now be held on 27 August. This is within the 270-280p range of my last recommendation. The new offer intends to lower the chances of a counteroffer by CD&amp;R.
On 9 August, the Takeover Panel extended the deadline for CD&amp;R to make an offer for Morrisons until 20 August. CD&amp;R is reportedly seeking financing/partners for a bid and had asked for more time to consider its options in response to the increased Fortress offer.
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Morrisons generates cash and is benefiting from WFH and higher demand due to home cooking. The balance sheet of the company, at 3.8x net debt/EBITDA and 2.8x EBIT/interest, is strong and has the backing of the freehold portfolio. Food retailers in the UK are behaving rationally and there  are no price wars looming. Private equity interest is due to largely low valuation of UK assets due to pandemic and Brexit.
As previously mentioned, Morrison is an already efficiently run business in terms of management of inventories and working capital and profitability comparable to that of Tesco and Sainbury's, therefore I see limited scope for value creation, other than financial, that is. On this basis I believe that it is unlikely that a financial buyer would be able to strip a substantial amount of cash out of Morrison.
According to my calculations, a 272p offer would rely on improving EBITDA margins (10-20 bps) and cutting Capex by a fifth (thus rendering the business potentially less attractive) and would reach an IRR of over 11% by year 8. Initial leverage would reach an uncomfortable 6.5x and debt/EBITDA would diminish to c. 4.1x by year 8. Exit multiple would be 8.0x, which I see as demanding. A higher IRR would imply a review of real estate (with sale&amp;leaseback, making the business more fragile, hopefully not "Punched" Taverns all over again), and a potential sale of the fuel business (which drives traffic into the stores).
I estimate that a counteroffer by CD&amp;R would have to be launched at 285p. IRR would be 12%, and would involve an 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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On 9 August, shares closed at 278.8p. Gross spread is -3%. At the current market price, I would not wait for an increased offer price (which could come at 285p, just 2% higher than the last closing price) as the risk/reward is unfavorable now, in my view. Upside risk could come from a Panel-led auction, as it seems it will be the case for Vectura.
Recommendation is sell into strength.
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On Friday 6 August, Morrison agreed to an improved offer from the Fortress consortium that valued it at £6.7 billion. Under the offer, accepting Morrison shareholders will get 272p/share, which represents a 7% premium to the original Fortress offer. Morrison's EGM will now be held on 27 August. This is within the 270-280p range of my last recommendation. The new offer intends to lower the chances of a counteroffer by CD&amp;R.
On 9 August, the Takeover Panel extended the deadline for CD&amp;R to make an offer for Morrisons until 20 August. CD&amp;R is reportedly seeking financing/partners for a bid and had asked for more time to consider its options in response to the increased Fortress offer.

Morrisons generates cash and is benefiting from WFH and higher demand due to home cooking. The balance sheet of the company, at 3.8x net debt/EBITDA and 2.8x EBIT/interest, is strong and has the backing of the freehold portfolio. Food retailers in the UK are behaving rationally and there  are no price wars looming. Private equity interest is due to largely low valuation of UK assets due to pandemic and Brexit.
As previously mentioned, Morrison is an already efficiently run business in terms of management of inventories and working capital and profitability comparable to that of Tesco and Sainbury's, therefore I see limited scope for value creation, other than financial, that is. On this basis I believe that it is unlikely that a financial buyer would be able to strip a substantial amount of cash out of Morrison.
According to my calculations, a 272p offer would rely on improving EBITDA margins (10-20 bps) and cutting Capex by a fifth (thus rendering the business potentially less attractive) and would reach an IRR of over 11% by year 8. Initial leverage would reach an uncomfortable 6.5x and debt/EBITDA would diminish to c. 4.1x by year 8. Exit multiple would be 8.0x, which I see as demanding. A higher IRR would imply a review of real estate (with sale&amp;leaseback, making the business more fragile, hopefully not "Punched" Taverns all over again), and a potential sale of the fuel business (which drives traffic into the stores).
I estimate that a counteroffer by CD&amp;R would have to be launched at 285p. IRR would be 12%, and would involve an 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.


On 9 August, shares closed at 278.8p. Gross spread is -3%. At the current market price, I would not wait for an increased offer price (which could come at 285p, just 2% higher than the last closing price) as the risk/reward is unfavorable now, in my view. Upside risk could come from a Panel-led auction, as it seems it will be the case for Vectura.
Recommendation is sell into strength.


Fortress/Morrisons: 272p Pre-Emptive Strike

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

On 19 June, <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>, aka Morrisons, said it had rejected a £5,522 mn cash offer from Clayton, Dubilier &amp; Rice (CD&amp;R). Morrisons said it had received an "unsolicited, highly conditional non-binding" offer proposal worth 230p/share (including final dividend of 5.11p/share, payable on 28 June), a c. 29% premium to the closing share price on 18 June. Morrisons said it had received the offer on 14 June and rejected it on 17 June.
The offer implies an equity value of £5,522 mn and EV of £8,713 mn, and values Morrisons at 7.8x EV/22e EBITDA and represents a 10% FCF yield (using Capital IQ consensus figures). At these levels, Morrisons' shares seem good value.
Bid speculation around Morrison has circulated since 2004, when Morrison acquired Safeway for £3 bn. Morrisons is Britain's fourth-largest grocer by sales. 
PUSU deadline: under UK takeover rules CD&amp;R has until 17 July to either announce a firm intention to make an offer or walk away.
Private equity is interested in UK supermarkets, because of their cash generation and freeholds.
In my view, Morrisons has the capacity to take on higher leverage: c. 85% of its stores are freeholds (book value is around £5.8 bn); it has gearing of 2.2x (including leases); and, FCF yield is near 10%.
After improvements in the business, Morrison is an efficiently run business in terms of management of inventories, working capital and profitability comparable to that of Tesco and Sainbury's, in my view. On this basis I believe that it is unlikely that a financial buyer would be able to strip a substantial amount of cash out of Morrison.
I estimate that by bidding 230p, CD&amp;R could achieve an IRR over 15% on year 6 (exit EV/EBITDA of 7.9x, g = 1.5%, cost of financing 200bps over 10-year swaps, 23% tax rate, 2022 Capital IQ consensus estimates).
A more aggressive bidder could offer 257p. The premium over 230p will depend on the bidder’s willingness to accept IRRs below 15% and the bidder’s view on increases in property values. The high leverage in any likely acquisition structure would allow the bidder to achieve substantial profits out of any revaluation of the property portfolio. Due diligence would be required to structure the financing of the offer. On this basis any bid would require the support of Morrison’s Board, in my view.
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However I believe that a financial buyer would add little to Morrisons.
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On 21 June, shares closed at 240.2p, a 34.6% increase, on hopes that CD&amp;R might raise its proposed offer. I would not rule out that Morrison's Board would be willing to discuss a higher offer, although I would wait until a firm offer is presented.
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On 19 June, Wm Morrison Supermarkets (MRW LN), aka Morrisons, said it had rejected a £5,522 mn cash offer from Clayton, Dubilier &amp; Rice (CD&amp;R). Morrisons said it had received an "unsolicited, highly conditional non-binding" offer proposal worth 230p/share (including final dividend of 5.11p/share, payable on 28 June), a c. 29% premium to the closing share price on 18 June. Morrisons said it had received the offer on 14 June and rejected it on 17 June.
The offer implies an equity value of £5,522 mn and EV of £8,713 mn, and values Morrisons at 7.8x EV/22e EBITDA and represents a 10% FCF yield (using Capital IQ consensus figures). At these levels, Morrisons' shares seem good value.
Bid speculation around Morrison has circulated since 2004, when Morrison acquired Safeway for £3 bn. Morrisons is Britain's fourth-largest grocer by sales. 
PUSU deadline: under UK takeover rules CD&amp;R has until 17 July to either announce a firm intention to make an offer or walk away.
Private equity is interested in UK supermarkets, because of their cash generation and freeholds.
In my view, Morrisons has the capacity to take on higher leverage: c. 85% of its stores are freeholds (book value is around £5.8 bn); it has gearing of 2.2x (including leases); and, FCF yield is near 10%.
After improvements in the business, Morrison is an efficiently run business in terms of management of inventories, working capital and profitability comparable to that of Tesco and Sainbury's, in my view. On this basis I believe that it is unlikely that a financial buyer would be able to strip a substantial amount of cash out of Morrison.
I estimate that by bidding 230p, CD&amp;R could achieve an IRR over 15% on year 6 (exit EV/EBITDA of 7.9x, g = 1.5%, cost of financing 200bps over 10-year swaps, 23% tax rate, 2022 Capital IQ consensus estimates).
A more aggressive bidder could offer 257p. The premium over 230p will depend on the bidder’s willingness to accept IRRs below 15% and the bidder’s view on increases in property values. The high leverage in any likely acquisition structure would allow the bidder to achieve substantial profits out of any revaluation of the property portfolio. Due diligence would be required to structure the financing of the offer. On this basis any bid would require the support of Morrison’s Board, in my view.

However I believe that a financial buyer would add little to Morrisons.

On 21 June, shares closed at 240.2p, a 34.6% increase, on hopes that CD&amp;R might raise its proposed offer. I would not rule out that Morrison's Board would be willing to discuss a higher offer, although I would wait until a firm offer is presented.




Head of Research, IPOs & Placements, Aequitas Research

Sumeet Singh

Head of Research, IPOs & Placements

IPOs and Placements coverage across Asia Pacific

Aequitas Research

We cover all listing across the Asia Pacific along with follow-up placements. As of Dec 2020, our team had covered 539 IPOs with a hit rate of 73.5% and 685 placements with a hit rate of 66.8%.

We combine fundamental bottom-up views with our proprietary quantitative framework to provide a holistic coverage across new listings and placements. Our coverage includes pre-IPO notes before the deal is launched, follow-up analysis once the deal is live and post-listing trading analysis as well.

Equity Capital Markets

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<a href="https://www.smartkarma.com/entities/dingdong-maicia" target="_blank" data-smartkarma-citation="entities:33461:1" rel="noopener">Dingdong Maicia (DDL US) </a>(DM), a groceries on-demand e-commerce company, aims to raise up to US$500m via a US listing. It is backed by Tiger Global, General Atlantic and Softbank.
Dingdong Maicai is an on-demand e-commerce company in China which provides users and households with fresh produce, meat and seafood and other daily necessities via its self-operated frontline fulfillment grid. As of 1Q21, DM had 6.9m monthly transacting users, who had placed 69.7m orders during the quarter. Its FY20 gross merchandise value was RMB13bn, representing a 10%+ market share for the on-demand ecommerce fresh groceries and daily necessities market.
</div><div>In our earlier notes, we have looked at the background and performance the company:</div><div><ul style="list-style-type: disc;">
<li dir="ltr" aria-level="1"><a href="https://www.smartkarma.com/insights/dingdong-maicai-pre-ipo-increasing-market-share-fast-growth-but-no-signs-of-profit" target="_blank" rel="noopener">Dingdong Maicai Pre-IPO - Increasing market share, fast growth but no signs of profit</a></li>
<li dir="ltr" aria-level="1"><a href="https://www.smartkarma.com/insights/dingdong-maicai-vs-miss-fresh-pre-ipo-one-clear-winner" target="_blank" rel="noopener">Dingdong Maicai Vs Miss Fresh Pre-IPO - One Clear Winner</a></li>
<li dir="ltr" aria-level="1"><a href="https://www.smartkarma.com/insights/dingdong-fresh-food-competition-in-and-outside-of-frontline-warehouse" target="_blank" rel="noopener">Dingdong (叮咚买菜): Fresh Food Competition in and Outside of Frontline Warehouse</a></li>
</ul></div><div>In this note we will provide our earnings forecast and talk about valuations.</div>


Dingdong Maicia (DDL US) (DM), a groceries on-demand e-commerce company, aims to raise up to US$500m via a US listing. It is backed by Tiger Global, General Atlantic and Softbank.
Dingdong Maicai is an on-demand e-commerce company in China which provides users and households with fresh produce, meat and seafood and other daily necessities via its self-operated frontline fulfillment grid. As of 1Q21, DM had 6.9m monthly transacting users, who had placed 69.7m orders during the quarter. Its FY20 gross merchandise value was RMB13bn, representing a 10%+ market share for the on-demand ecommerce fresh groceries and daily necessities market.
In our earlier notes, we have looked at the background and performance the company:
Dingdong Maicai Pre-IPO - Increasing market share, fast growth but no signs of profit
Dingdong Maicai Vs Miss Fresh Pre-IPO - One Clear Winner
Dingdong (叮咚买菜): Fresh Food Competition in and Outside of Frontline Warehouse
In this note we will provide our earnings forecast and talk about valuations.

Dingdong Maicai Pre-IPO - Thoughts on Valuation

United Kingdom

Morrisons is the fifth largest supermarket chain in the United Kingdom, retailing groceries, clothing, and general merchandise products. The company also operates as a food maker with 19 manufacturing facilities. It was founded in 1899 by William Morrison and is headquartered in Bradford, England.

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Morrisons (MRW LN)

Fortress/Morrisons: 272p Pre-Emptive Strike

Gross spread is -3%. An increased offer price could come at 285p on demanding exit multiple, but risk/reward seems unfavorable now. Upside risk...

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

CD&R/Morrisons: Takeover Approach

A more aggressive bidder could offer 257p, depending on the willingness to accept IRRs <15% and view on increases in property values. Any bid would...

Jesus Rodriguez Aguilar

Dingdong Maicai Pre-IPO - Thoughts on Valuation

Dingdong Maicia (DDL US), a groceries on-demand e-commerce company, aims to raise up to US$500m via a US listing. It is backed by Tiger Global,...

Sumeet Singh

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