Private equity is changing supermarkets
CD&R’s takeover of Morrisons hasn’t been the first of its kind, but it has shown a trend among supermarkets and their investor suitors. With Morrisons’ results being worse off than they were a year ago, what is the end goal for these deals?
After being dethroned as one of the Big Four supermarkets by Aldi in late 2022, Morrison’s most recent blow came in the shape of £1.5bn worth of losses one year after being acquired by Clayton, Dubilier and Rice (CD&R) in October 2021 for £7bn with a debt-led takeover.
Morrisons, which had a net debt of £3.2bn before the takeover, was clearly in dire straits even before CD&R came on the scene. In the year before the takeover, the supermarket chain experienced a 15% drop in underlying profits to £828m and a pre-tax loss of £33m due to sales decreasing by 4.2%, despite the fact that consumers were paying 13.3% more on food due to inflation, according to the BRC.
Given that private equity firm CD&R stepped in with a bid that was 60% higher than Morrison’s stock market price, it may have seemed like the best course of action for the supermarket at the time. And in some ways it was; since the takeover, the supermarket has managed to fix interest rates on roughly 75% of its debts and has also deferred repayments on debt until 2025.
That said, what isn’t encouraging about the American equity firm’s Morrisons takeover is that the supermarket’s most recent financial results spelled losses that included £400m in interest payments. And given this dismal performance, Morrisons also risked axing 1,000 jobs last week after it made known its plans to get rid of at least 80 property maintenance suppliers.
According to The Corporate Law Journal, the strategy employed by private equity companies is to lower interest rates through borrowing in a bid to grow the company before ultimately selling it again for a profit. As Michelle Meagher and Vivek Kotecha told The Guardian in July 2021, “private equity makes for a good buyer in the short term if your goal is to protect market competition”. For years now the Competition and Markets Authority has objected to the same private equity firms purchasing many companies – in this case, supermarkets as with the Issa Brothers who wanted a stake in more than just Asda – on the grounds that it would remove competition and be to the detriment of the consumer.
Lately, supermarkets have gotten the bulk of equity firms’ attention thanks to a spike in sales due to pandemic closures of restaurants and other food markets. This is paired with the substantial freehold estates that give supermarkets many business opportunities, as they can be sold off to real estate investment trusts as arrangements to pay off debts.
However, not all acquisitions end up in further losses for the acquired company; for Joules, which was purchased out of administration by Next for £34m, it meant downsizing its estate of brick-and-mortar stores and focusing on online sales on Next’s platform. Meanwhile, online fashion retailer, In The Style, has agreed to sell the business to private equity investor Baaj Capital for £1.2m as a way to avoid administration altogether.
In the vein of supermarkets, the latest news is that John Lewis is now considering ending its 100% employee ownership so it can attempt to raise between £1bn and £2bn of new investment, according to The Sunday Times. Though this would only be a “minority stake”, it would still mean investor intervention in a company that has traditionally been employee-centric.
While industry watchers have monitored retailers’ plight under private equity ownership, it still hasn’t stopped it from permeating all corners of the high street and the price of short-term investment goals will eventually be for employees and the consumers to bear, which should be something to consider when making deals of this magnitude.
