Private equity deals done in the midst of a crisis have a history of going bad.
When Clayton, Dubilier & Rice (CD&R) beat SoftBank-backed Fortress in the bidding war for Morrisons in 2021, their win was hailed as a triumph for everyone involved.
CD&R had big plans for transformation by expanding the grocer’s forecourt presence and opening convenience stores, unlocking value from real estate and repositioning it as an upscale chain, making the most of supplies “House”.
It didn’t work like that.
Blemished takeover: Morrisons was forced to shed assets – and an annual profit of £201million before the public-private takeover turned into a whopping £1.5billion loss
The testosterone-fueled bidding war, which ended in a Saturday blind auction conducted by city arbiter, the Takeover Panel, resulted in a valuation of nearly $10 billion. pounds on the grocer (including debt).
As soon as the deal was done, the wheels came off. The period of rock-bottom interest rates came to an abrupt end as the Bank of England braked sharply amid the threat of double-digit inflation following Covid bottlenecks.
Then, a year ago, came the war in Ukraine.
As energy prices soared, it breathed new life into the cost of living crisis and already intense price competition between Britain’s big four grocery chains – Tesco, Sainsbury’s, Asda and Morrisons.
What no one foresaw was the aggressive expansion of no-frills German chains Lidl and Aldi, with seemingly unlimited funds to increase their market share.
The result is financial and business disaster. Soaring interest rates undermined the logic of a debt-fueled deal.
It paid £593million in interest in the year to October 2022, leaving nothing in the kitty for the proposed expansion.
Instead of hoarding assets through potential forecourt deals, Morrisons was forced to dump them – and an annual profit of £201m before the public-private takeover was turned into a whopping £1. £5 billion.
Reporting periods and relevant units may not be strictly comparable. But there is no wrong direction of travel.
Rising interest rates and rising costs of supplying production meant that Morrisons, despite the superior quality of meat, fish and produce from its farms, factories and fishing fleet, lost share of the market, Aldi and Lidl being the winners.
If the time is right, private equity, with its accounting data and marketing skills, has shown its ability to reposition companies and add enormous value.
Refinitiv data service, F1 motor racing and Worldpay all come to mind.
There were also horrific results. Private equity ownership helped destroy Debenhams.
The untimely takeover of EMI by Guy Hands (in the eye of the Great Financial Crisis) led to the balkanisation of the UK’s biggest music production company.
And Blackstone’s in-and-out ownership in Southern Cross has benefited its investors and left care home residents dry. Morrisons is the latest addition to a disturbing parade of spoiled and destroyed businesses.
Wilson’s Lament
One would expect nothing less from the managing director of Legal & General Nigel Wilson than to go out with a bang.
Not content with generating £1.9bn of new cash in 2022 and lifting the dividend, Wilson has some somber words for the Tories ahead of next week’s Budget.
He decried the perpetual drift of listed companies from the City to New York and Europe, and expressed frustration with the UK’s low-growth, low-productivity economy.
Wilson has done its fair share to use L&G’s strong balance sheet to support innovation, with the Helix center in Newcastle and development deals with Oxford University. He set a shining example for the rest of the UK’s defensive-minded asset managers.
L&G’s misjudged association with liability-driven investing at the heart of last fall’s gilt market meltdown was a rare misstep. Everybody makes mistakes.
Audit trail
We are still awaiting the birth of the new statutory auditing, reporting and governance authority of the Conservators.
That didn’t stop its ineffective predecessor, the Financial Reporting Council (FRC), from toughening its law after Carillion’s collapse.
His latest target is auditor PwC, who has been fined (the fourth since June 2022) for botched audits at engineer Babcock.
FRC activism has been seen recently in the start-up financial group Revolut.
Better to act preventively rather than after the Lord Mayor’s show.
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