Morrisons is on private equity’s shopping list; could Sainsbury’s be next?


Guessing which company will be the next to be targeted by private equity is probably a pointless activity.

As the adage has it, you have to kiss a lot of frogs before you find your prince.

Largely pointless it may be but a bit like betting on England to beat Germany in a major tournament, it can be fun and (very) occasionally profitable.

Private equity’s classic game plan

In an ideal world, a private equity firm likes to buy a company using the target’s own money.

In practical terms, that means finding a company with assets valued at a level close to the market capitalisation; if the company has a steady and reliable cash flow, even better.

The private equity firm can borrow using the target company’s assets as security and use the cash flow to pay the interest payments.

So, we are looking for companies whose price to net asset value (NAV) ratio is low.

A quick search of FTSE 350 companies generates 62 companies where the ratio is less than one, which is a surprisingly high number and suggests that a lot of companies need to get on the case and update their asset values more realistically.

Most of the 62 companies are financial songs, including banks such as Virgin Money UK PLC (LON:VMUK) and Lloyds Banking Group PLC (LON:LLOY).

It’s decades since the Saatchi brothers surprised the City with a harebrained scheme to buy the Midland Bank and I’d be surprised were a bid to emerge for a UK bank from any entity other than another bank.

Property companies on the other hand …

Hammerson PLC (LON:HMSO) is trading at half of its (ostensible) net asset value, Land Securities PLC (LON:LAND) at 70%, with British Land PLC (LON:BLND) and Shaftesbury PLC (LON:SHB) at 80%.

This week we have had reports that office leasing specialist IWG PLC (LON:IWG) is “in play”, although CC Capital Partners has responded to the press speculation and ruled itself out as a potential partner while last week, we had St Modwen Properties PLC (LON:SMP) agreeing to a 560p cash offer from investment funds advised by Blackstone. The terms value St Modwen at 25.1% more than the share price prevailing before the idea of a bid first became public, and is 21.1% above St Modwen’s estimated EPRA (the industry standard) NAV per share of 463p.

So, property companies are definitely in play but which one?

If I knew that, I would not be hacking out a living as a journalist.

Famous names possibly under the microscope

Outside of the financial sector, we have a few household names that private equity firms might be interested in.

Electricals retailer Dixons Carphone PLC (LON:DC.) trades at 60% of its NAV while Bisto to Mr Kipling brands owner Premier Foods PLC (LON:PFD), mobile phone networks operator Vodafone PLC (LON:VOD), pubs group Mitchells & Butlers PLC (LON:MAB) and buses operator FirstGroup PLC (LON:FGP).

Most of those seem to be carrying offputting amounts of debt, as indicated by this list of “net debt to EBITDA (underlying earnings) ratios”.

  • Dixons: net debt is 5.2 times annual EBITDA
  • Premier Foods: 2.0
  • Vodafone: 4.2
  • M&B: 8.5
  • FirstGroup: 3.6.

The one that stands out is Premier Foods but what about some stocks that are not household names?

Check out oilfield support services provider John Wood Group PLC (LON:WG.), trading at half its NAV with net debt of 2.5 times annual underlying earnings.

Or oil producer Cairn Energy PLC (LON:CNE), which is valued on or around its net asset value and has no debt and a pile of cash.

Perhaps, however, when trying to guess where private equity will go fishing next it is best to look where it is has fished in the recent past.

Judging by the flurry of announcements concerning holdings in Morrisons (Wm.) Supermarkets PLC (LON:MRW), the supermarket chain is still regarded as being in play despite apparently having sent Clayton, Dubilier & Rice (CD&R) away with a flea in its ear earlier this month.

Friday’s news that CD&R has been persuaded to increase its indicative offer for UDG Healthcare suggests that even hard-bitten private equity firms can be prevailed upon to squeeze a bit more blood out of a stone, so maybe Morrisons will receive a better offer.

After all, Asda found a buyer and it is of a similar size to Morrisons.

READ UDG Healthcare agrees to higher bid from Morrisons stalker

Alternatively, and talking of Asda, there is J Sainsbury PLC (LON:SBRY), which failed in its own attempt to acquire Asda because of competition concerns. This might be the next supermarket giant to find itself on the receiving end of an approach.

Valued at roughly 90% of its net asset value and with its debt level only 2.4 times its annual net operating cash flow, the supermarket chain has almost certainly been put under the microscope by a private equity firm.

Qatar’s sovereign investment fund holds just under 15% of the shares and VESA Equity Investments owns just under 10%; persuade those two to back your bid and you’re halfway home (to a 50%+1 majority).


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