Morrisons share price: can it go further?

Supermarket aisle with empty green trolley

The Morrisons (LSE: MRW) share price is on the move, riding the highs of a bidding war between US private equity firms. Its share price has stayed under 200p since late 2019. Then talks of a buyout in mid-June kickstarted a huge leap. As I write, the share price is at 290p, representing a 50% increase over its 2020 average. 

Index manager FTSE Russell has just added Morrisons to its “indicative FTSE 100 additions” list. This makes it likely to join the FTSE 100 next week. Could this cause the Morrisons share price to rise even further?

The takeover battle

With nearly 500 shops and 110,000 staff, Morrisons holds a 10.4% share of the UK grocery market. Thanks to an ongoing bidding war between two US based private equity firms, Clayton, Dubilier & Rice (CD&R), and Fortress Investment Group, it now has a market cap of £7bn. This makes Morrisons worth more than other FTSE 100 companies, including ITV and Weir Group.

In July, CD&R made a £5.5bn bid which was rejected by the Morrisons board who said that the offer “significantly undervalued” the retailer. Fortress stepped in with an increased bid of £6.7bn, which the board recommended to investors. Last week, Morrisons accepted an improved bid of £7bn from CD&R, leaving Fortress “considering its options.” 

The current share price is 5p more than CD&R’s 285p per share bid. It seems investors think that the takeover battle isn’t over yet. However, I suspect the UK takeover panel could soon step in to reduce its share price volatility. It might put Morrisons up for sale in a formal auction, which could see its share price increase further.

Bigger picture for the Morrisons share price

There’s a pattern forming of UK companies being bought out by US private equity firms. Back in 2012, CD&R acquired B&M European Value Retail on advice from Sir Terry Leahy, which it later sold for a £1bn profit. Sir Terry has a personal relationship with Morrisons chairman Andrew Higginson, who was CFO at Tesco while Sir Terry was CEO.

The value of the pound has not completely recovered from its pre-Brexit lows. This reduces the price of UK businesses when they’re bought in dollars. In the last eight months, foreign private equity firms have spent more buying UK companies than in the last five years combined. 

Foreign investment does show confidence in a post-pandemic, post-Brexit UK. On the other hand, private equity buyouts often include loading companies up with debt, selling their assets, and moving decision-making stateside. In the case of Morrisons, a key concern is that its real estate holdings could be sold and rented back. This would increase initial profits, but at the expense of long-term sustainability. With a price-to-earnings ratio of 72, the company now seems overvalued compared to Tesco at 26.

As a value retailer, Morrisons is also useful as a hedge against a potential stock market crash. Prior to the takeover battle, the company was clearly underrated, but I’m not sure its current valuation is justified compared to its competitors. Ultimately, I don’t think the Morrisons share price will rise much further. 

However, the wider trend of US private equity seeking value in UK firms intrigues me. I’ll be spending September looking for other potential bargains that may be targeted.

The post Morrisons share price: can it go further? appeared first on The Motley Fool UK.

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Charles Archer has no position in any of the shares mentioned. The Motley Fool UK has recommended B&M European Value, Morrisons, and Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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