ALEX BRUMMER: Morrisons is selling the pass to private equity
We can no longer describe a takeover auction, carried out by the city arbitrator of the takeover commission, as a rarity.
The bidders for the Morrisons supermarket group, the private equity firms Fortress and Clayton, Dubilier & Rice (CD&R), will compete against each other this Saturday, October 2nd.
After the contested offers for G4S and Vectura, it is the third time that the proceedings have recently been used.
Going … going: The bidders for the Morrisons supermarket group, the private equity firms Fortress and Clayton, Dubilier & Rice, will compete against each other this Saturday, October 2nd
The big disappointment is that a downright weak Morrisons board of directors, led by Andy Higginson, was essentially saying, come and get us.
It bowed its knee to Mammon, ignoring the broader stakeholder responsibilities set out in Section 172 of the Companies Act.
A stronger sense of duty to the workforce, suppliers, the country’s food security and the interests of taxpayers would not have been wrong.
In tough economic times, it is difficult enough for governments to convince responsible public companies to act in the public interest. Imagine how much harder it would be to deal with the economic vandals of private equity.
Both bidders are unsuitable owners. Fortress is controlled by Softbank and includes controversial Koch Industries in its consortium.
Koch has a reputation for being a far-right propagandist in the US and shouldn’t be allowed near a company that is a critical part of the UK food supply chain.
Fortress has not yet committed to improving and strengthening the pension fund.
The suspicion is that it is ready to sell Morrison’s real estate property that could have been used as a contract for the grocer’s current and future retirees. CD&R got involved and reached an agreement with the trustees of the pension fund.
This doesn’t mean we should be on the sidelines cheering former Tesco boss Sir Terry Leahy and CD&R home next week.
But they have a better track record of building UK businesses, most notably the no-frills retailer B&M. In addition, CD&R has a true UK headquarters and operational capabilities that Fortress lacks.
But its funding model is far from benign. As with all private equity deals, the offer for Morrisons, which already has its own mountain of debt, will be financed by further borrowing.
This makes the ownership structure riskier in times of potentially rising interest rates. It also means that debt interest can be intelligently offset against taxes, which will lower or even destroy corporate tax revenues.
In addition, like much of the private equity industry, CD&R has settled in the offshore and opaque Cayman Islands.
The reason for this is that any dividends that will be distributed to the new owners will be better able to avoid the attentions of HMRC.
UK water companies were effectively urged by regulator Ofwat to re-land in the UK after dividends – which should have gone into wastewater treatment and investments – were paid to offshore companies.
The moment of truth for the easily-impressed Morrisons board will come should Fortress offer a higher price.
It would be caught between the devil and the deep blue sea.
How much better it would be if the directors decided that anything private equity can do overseas can do better.
One of the hallmarks of recent tech floats is the unwillingness of founders to give up power. It’s often sustained by dual-class shares and sticking to the top jobs.
If fintech stars want to show determination and the highest standards of integrity, they need people in the role of CEO with city experience.
A lesson from the financial crisis was that a gifted amateur as chairman of Northern Rock and a pharmacist who ran the Royal Bank of Scotland offered no protection to depositors or shareholders.
Payment specialist Wise sold itself to investors as a disruptor, changing the model and reducing the cost of international money transfers. It’s commendably making a good profit and has an impressive Â£ 8 billion valuation.
It is therefore a little shocking that one of the founders, Kristo Kaarmann, takes the form of missing his taxes and belatedly admitting that he should have devoted more time to his personal administration.
Wise plans to promote former Netflix CFO David Wells to chair this year. It’s even better to find a City Grande as a senior non-executive.
Other companies like Revolut with Martin Gilbert as Chairman and Primary Bid with Donald Brydon have taken this route.
Wise does not show much wisdom.
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