Morrisons’ supply deal with Amazon could be a major factor in what is shaping up to be the biggest takeover battle of the summer, with the scale and scope of Amazon offering bidders a unique chance to be part of what could be a major market upset.
This morning Morrisons share price rocketed more than 11 per cent following news of yet another private equity firm circling the supermarket chain.
Private equity firm Apollo, the third firm to enter the fray, this morning said it was “in the preliminary stages of evaluating a possible offer” for the supermarket, fuelling speculation that private equity giants are soon to enter a bidding war for the chain.
Morrisons has already accepted a £6.3bn takeover offer by a consortium of funds led by private equity firm Fortress, however it will be up to the shareholders at the next general meeting to make the final decision on whether the takeover will go ahead.
New York bidder Clayton, Dubilier & Rice has already had a £6bn offer rejected, which Morrisons said “significantly undervalued” the company.
Other bids could well come into play, with analysts pointing to Morrisons’ deal with online giant Amazon – literally the world’s most valuable brand – as a particularly attractive proposition to potential bidders.
Last year the e-commerce giant announced it will offer free grocery deliveries for Prime customers, at the time representing a major step up in competition between the internet giant and UK supermarkets. Amazon Fresh has since expanded to physical stores.
Morrisons is unique among the UK’s largest supermarkets as it is the only one to have its foods stocked by Amazon Fresh, which helped to boost Morrisons’ online sales by 113 per cent in the first quarter of its latest financial year.
As a result of the Amazon partnership, there has also been speculation of a surprise takeover bid by the online giant.
‘Key growth factor’
Ross Hindle, analyst at Third Bridge, pointed out the three brick-and-mortar Amazon Fresh stores in London are all stocked by Morrisons.
“With consumers now well accustomed to online grocery shopping, Amazon has growing expectations for its Fresh concept. Our experts believe this partnership will prove a key differential growth factor for Morrisons,” he added.
As it stands, Amazon Fresh still represents a relatively small player in the UK, despite growth of more than 17.6 per cent in 2020 at the height of the pandemic, when health concerns saw more people buying essentials online, many for the first time.
However that could change, and Amazon’s financial gusto combined with Amazon Fresh’s UK expansion could pose a major upset for established supermarket players.
Russ Mould, investment director at AJ Bell, said Morrisons’ Amazon strategy made the supermarket chain resilient during the pandemic.
“There was plenty of time for suitors to make their move [on Morrisons] when it was clear that Covid vaccines were successful and would help to reopen society,” he said.
“Morrisons’ strategy of being a strategic supplier to Amazon and McColl’s was also well in motion, and it had proved to be a resilient supermarket operator during the pandemic. We knew all this in 2020 and it’s taken until mid-2021 to see bid action.
“Perhaps interested parties only made their move once they could see that UK assets were becoming more attractive to overseas investors. Private equity firms have been sitting on oodles of cash for a long time, known as dry powder in the industry, and they now look intent on going on a spending spree.”
Interactive Investor head of markets Richard Hunter said it was “perfectly feasible” other plays could enter the fray in the war for Morrisons, including Amazon itself, which he said could “emerge from from left field as a surprise last minute entrant.”
“UK supermarkets in general are cash generating engines, whose share price gains have been capped by the costs of the pandemic, despite increased sales, making them more attractive on valuation metrics,” he said.
“In addition, Morrisons largely owns its freehold estate, adding another sweetener to any potential purchase.”