CD&R won an auction for Britain’s Morrisons with a 7 billion pound bid, edging out a consortium led by SoftBank’s Fortress. The winner could be overpaying, making rival grocer Sainsbury’s look more attractive as a fallback option, writes dasha_reuters
Unlike Morrisons, the 7 billion pound grocer doesn’t produce some of its own food and has a smaller freehold property portfolio. But it has a bigger market share and better online offering. And even with the same buyout premium, it could generate passable returns.
Assume Fortress improves Sainsbury’s EBITDA margin a notch to 8%, manages to grow revenue 2% a year and finances a third of its acquisition with equity, as per CD&R’s Morrisons bid. In five years’ time, after using a third of the EBITDA generated to pay down debt, the internal rate of return would be 18%, according to Breakingviews calculations based on an 8.7 times EBITDA exit multiple, the same as its entry.
Luckily for Fortress, which has $54 billion under management, Sainsbury’s share price has slipped back from the 342 pence peak scaled in August when takeover speculation picked up. Unluckily, Asda losers Apollo Global ManagementFollow- U.S. private equity group Clayton, Dubilier & Rice on Oct. 2 won an auction for Britain’s Wm Morrison Supermarkets with a 7 billion pound bid, narrowly beating an offer from a consortium led by SoftBank Group-owned Fortress Investment.
- CD&R had offered 287 pence per share, just 1 pence more than the Fortress consortium, the Takeover Panel, which governs M&A in Britain, said in a statement. - CD&R’s offer was slightly higher than the 285 pence a share offer recommended by Morrisons’ board in August.Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.
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