How a takeover could affect the Morrisons share price

July 8, 2021 0 Comments

The Morrisons (LSE:MRW) share price recently surged following a takeover bid by the private equity firm CD&R last month. The offer was firmly rejected by the management team. But it subsequently led to new proposals from other interested parties. Analysts have described this as a looming bidding war. But what does this all mean for the Morrisons share price? Let’s take a look at what I think can be expected in the future. 

The underlying business

Morrisons Supermarket is headquartered in Bradford. It is the fourth largest chain of supermarkets in the United Kingdom. With about a 10.4% market share, the retailer peddles its wares to consumers in-store and online.

In total, the company has a vast real-estate portfolio, with 497 supermarkets scattered across the UK along with 58 daily kiosks and another 338 fuel stations. While its core operations are selling groceries to consumers, the management team has been exploring different avenues for growth through acquisitions.

The company acquired Chippindales, a leading supplier of free egg range eggs, in 2018. In 2020 it bought Lansen Nursery to expand its plant of herb product supply chain. And more recently, Falfish, a wholesaler of sustainably sourced seafood, was added to the collection. 

How a takeover could affect Morrison’s share price

The mere mention of the possibility of an acquisition causes enough volatility in the stocks of companies involved. The Morrison share price experienced this with a 50% jump following the initial offer from CD&R. That bid was rejected because it was seen as undervalued by the management team.

Soon after, Morrison received bids from other companies before agreeing to a £6.3bn offer from a US-based private equity firm, Fortress Investment Group. Fortress partners with Koch Real Estate Investment and Canada Pension Plan Investment Board. This takeover bid will see shareholders receive 252p per share plus a 2p special dividend. However, it is important to remember that shareholders have yet to approve the acquisition.

How could the Morrisons share price react to this takeover? 

A takeover bid tends to drive up the target company’s stock price because buyers pay a price above the current market price. This is also called a premium. That’s why the Morrisons share price initially jumped to match the offer price. 

Today the stock is trading at around 266p. This is actually higher than the accepted offer by Fortress. And so, it seems investors are expecting another bid to be made. It is worth noting that another private equity firm called Apollo Global Management have expressed interest but have yet to make an offer.

Needless to say, if a higher offer is made, the Morrisons share price will continue to climb. And personally, I think this certainly a possibility. However, there is no guarantee that another offer will be made. And as the share price is currently higher than the offer price, there is an element of risk. Something else that gives me pause is the driver behind the elevated state of the stock. It’s entirely possible that the acquisition does not go ahead as planned. And if no other bids are made, the Morrisons share price could crash just as quickly as it went up.

Wrapping up

Until a deal is concluded, one cannot say which company will acquire Morrison Supermarket or that the shareholders will even approve the acquisition. Speaking on the takeover bid led by Fortress, the Chairman of Morrisons, Andrew Higginson, said, “The Morrisons directors believe that the offer represents a fair and recommendable price for shareholders which recognises Morrisons’ future prospects.”.

Personally, as the Morrisons share price seems to be elevated by speculation of a higher bid that may never come, I’m not interested in adding this business to my portfolio.

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Prosper Ambaka does not own shares in any of the companies mentioned. The Money Cog has no position in any of the companies mentioned. Views expressed on the companies and assets mentioned in this article are those of the writer and therefore may differ from the opinions of analysts in The Money Cog Premium services.

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