After US private equity group Fortress was defeated by Clayton, Dubilier & Rice in its attempt to buy Wm Morrison Supermarkets last weekend, pundits are wondering whether Fortress will seek other targets in the UK’s supermarket sector.
“The UK remains a very attractive investment environment from many perspectives and we will continue to explore opportunities to help strong management teams grow their businesses and create long-term value,” said Joshua Pack, the co-chief investment officer and managing partner at Fortress Investment Group.
If Fortress is still exploring opportunities in the supermarket sector, there aren’t many publicly listed candidates.
There is J Sainsbury PLC (LSE:SBRY), which has reportedly hired financial advisers to help defend it from a potential takeover. Private equity group Apollo, which missed out on the takeover of Asda last year, has reportedly been sniffing around.
The company has a market capitalisation of GBP6.9bn and more than GBP7bn in property assets, so you don’t need to be a private equity vulture to work out the potential appeal of a takeover.
The potential flies in the ointment are two of its biggest stakeholders; Qatar’s sovereign investment fund holds just under 15% of the shares and VESA Equity Investments owns just under 10%.
While cynics might argue that a publicly listed company’s directors, with more than half an eye on their executive share option schemes, can be persuaded to back a bid without too much arm wrestling, the likes of Qatar’s sovereign investment fund can afford to hold out for a pretty penny – and private equity groups are not known for paying top dollar.
Then there is Ocado Group PLC (LSE:OCDO), which these days is thought of more as a technology firm. The UK is not known for its reluctance to allow its technology champions to fall into foreign hands so it is not beyond the realms of possibility Ocado could end up being taken over but probably not by a private equity group. Private equity likes cash-generative companies, not cash-hungry ones.
It also comes with a lot of property but as the retailer has been closing outlets willy-nilly for at least 12 years, with the cull gathering speed in the last three years, the estate does not have the appeal it once did.
Tesco is king of the UK jungle
This leaves Tesco PLC (LSE:TSCO), the 800 lb gorilla of the UK supermarket scene, albeit a gorilla that has given up its global ambitions to concentrate on remaining king of the jungle in its home market.
Not so long ago, the thought of Tesco being a takeover target, rather than the one making the acquisition overtures, would have been almost unthinkable. It has a market capitalisation of GBP19.5bn, about two-and-a-half times what Fortress was prepared to pay for Morrisons. On top of that, it has debt of around GBP12bn, making what is termed its “enterprise value” around GBP31.5bn, while the group’s pension deficit is around GBP1bn even after it made a one-off pension contribution of GBP2.5bn last year.
As such, Tesco might prove a bit of a mouthful for Fortress but with fellow private equity group Apollo also having cash burning a hole in its pocket, a joint bid would not be out of the question.
As we can see from Qatar’s investment in Sainsbury’s, sovereign wealth funds might also be interested in pitching in on any bid, as might family offices and persons of high net worth.
The weakness of sterling, low interest rates and tax laws that seem to actively encourage private equity raiders are all factors that could lead to Tesco coming under private equity’s microscope.
“The UK is going to remain of interest so long as interest rates remain low, and there is lots of liquidity available,” said Clive Black, the veteran retail analyst at Shore Capital.
“Fortress put a lot of resources into this bid. It employed a lot of advisers, raised a lot of financing and undertook a lot of legal advice. It sounds like they might be active further down the line,” Black said, although he is of the opinion that a bid for Sainsbury’s is more likely.
Black reckons there is a 30-40% chance of a Sainsbury’s bid and a 10-15% chance of a Tesco bid.
Tesco is set to declare half-year results tomorrow and the numbers are expected to be good, although there is likely to be lots of commentary on delivery driver shortages and other supply chain issues.
With its efforts focused on ensuring Joe & Josephine Public have a more or less traditional Christmas, the last thing Tesco’s management needs is to be fighting off unwanted attention from US private equity groups.