Private Equity’s latest target: Morrisons goes Private
July 29, 2021
2 min read
What's going on here?
In light of private equity’s descent upon corporate Britain, Morrisons has been subject to a buyout bidding war by foreign private equity firms.
What does this mean?
In the last month, Britain’s fourth-largest supermarket chain has seen three bidders arrive all at once. On Saturday 3 July 2021, Morrisons approved a £6.3bn offer from Softbank Group, which is owned by Fortress Investment Group. Nonetheless, it is predicted that this is not the end as Apollo Global Management has already suggested it might make a rival offer. The UK’s previously ‘sleepy’ British supermarket sector is being revamped in order to meet politicians’ priority for food security and its potential to maximise its property assets.
This buyout is the latest play in the UK’s corporate shift towards private equity that has developed in a post-Brexit and COVID era. At a basic level, private equity is an alternative form of private finance. Money is pooled in by funds and high-net-worth investors to either purchase stakes in private companies or to acquire control of public companies. This allows for a company to be flipped in order to increase returns for investors, and to allow investors to pocket a percentage for management fees and performance fees.
Consequently, the past five years of Brexit instability has resulted in UK shares looking ‘cheap’, and to foreign investors, attractive. Previously, the economy has been dominated by companies listed on public markets. Nevertheless, the private equity industry has been triumphant and now, UK buyouts are up by almost 60% in 2021 compared with the same period in 2019.
What's the big picture effect?
According to Lord Paul Myners, the former London City Minister, the London Stock Market is open for business ‘in the same way that a car boot sale is open for business’. Consequently, private equity has been making its mark upon Britain and it has received a very mixed response.
On the one hand, the shift enables a previously undervalued company to be equipped with expertise and financial support. Private equity has the benefit of revitalising these companies with the extraordinary funds to do it without the public market volatility or high-interest bank loans.
On the other hand, private equity has a reputation for ruthlessly chasing money even at the detriment of the company it has bought, for example by loading the businesses up with eye-watering debt, breaking them up and selling parts off. This can be dangerous as it may undermine the core values of a company and cause long-term financial obligations. Private equity also has a reputation for poor performance regarding employment rates. This potential risk is especially significant when realising that over a million British workers (3% of the UK’s total workforce) are employed by private equity shareholders.
As a result of private equity activity ramping up, it is expected that there will be a large influx of activity for private equity lawyers in the future. This post-COVID influx is already showing with companies such as Asda, Leon, John Liang and many others being snatched up by private equity. However, as supermarkets are traditionally low-margin businesses without the typical high returns private equity usually seeks, what will this mean for consumer prices?
Report written by Sofia Antipatis
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