Could supermarket giants fall prey to private equity vultures? As Morrisons rejects £5.5bn takeover, experts warn Sainsbury's and Tesco may be next targets

• US company Clayton, Dubilier & Rice has offered £5.5bn for British supermarket 
• One of the most audacious takeovers attempted by private equity firm  
• Since last year, firms swooped on 120 British firms in deals worth over £36bn

A private equity firm’s bid to buy out Morrisons could pave the way for takeovers of bigger rivals such as Tesco and Sainsbury’s, experts warned yesterday.

US company Clayton, Dubilier & Rice has offered £5.5billion for the British supermarket, which is the UK’s fourth-biggest and employs 118,000 staff.

It is one of the most audacious takeovers attempted by a private equity firm during the Covid-19 pandemic – and has sparked fears that other household names could be next.

Since the start of last year, buyout firms have swooped on more than 120 British firms in deals worth over £36billion.

The Daily Mail has campaigned for greater transparency in the debt-fuelled sector and for an end to sharp practices. Following the bid for Morrisons, experts said top firms such as Marks & Spencer, Sainsbury’s and even Tesco now look vulnerable to the predators.

The Morrisons bid has so far been rejected on the grounds that it is too low and ‘significantly undervalued’ the supermarket. But Clayton, Dubilier & Rice (CD&R) could come back with a higher offer.

Any takeover by the firm would mean two of the UK’s ‘Big Four’ supermarkets have fallen into private equity hands, sparking fears for jobs.

Asda was this year bought by the British billionaire Issa brothers and TDR Capital for £6.8billion in a deal heavily financed by debt.

Supermarkets are viewed as attractive investments to buyout firms because they generate a lot of cash and tend to own most of their buildings outright.

Justin Urquhart Stewart, a City investment manager, yesterday claimed that the bid for Morrisons would send chills through British boardrooms. He said: ‘Is there now a business in this country which is going to feel safe from private equity takeover? There can’t be many.

‘With the supermarkets, these are big names but they are up against international buyout firms that can raise huge sums of cash very quickly.

‘If shareholders are more interested in short-term gains rather than long-term growth, then a number of FTSE 100 companies could be seriously worried right now – even Tesco.

He warned that private equity takeovers were often ‘quick turnarounds’ and said of the CD&R bid: ‘Will that really be good for the country or good for Morrisons? Probably not.’ Meanwhile, another City source said of the Morrisons bid: ‘The whole groceries sector in the UK is now in play.’

And Richard Hyman, an independent retail expert who has advised the big supermarkets, agreed that ‘everyone can be bought for a given price’.

He said CD&R’s previous investment in British discount retailer B&M in 2012 was generally viewed as a success.

But he added that the private equity firm would almost certainly look to slash jobs and sell some of Morrisons’ properties if it took over the supermarket. Former Tesco boss Sir Terry Leahy is now an adviser to CD&R and Mr Hyman said he had almost certainly played a role in putting together the bid for Morrisons.

Earlier this year, CD&R agreed a £2.8billion takeover of healthcare group UDG and a £308million takeover of plumbing group Wolseley. The buyout spree is being fuelled by the relatively low share prices of many UK businesses and the availability of cheap borrowing due to low interest rates.

The Bradford-based Morrisons chain has about 500 stores and 18 manufacturing sites, owning the freeholds to around 85 per cent of its properties. It is also the UK’s second-biggest producer of fresh food, making everything from bread to beef and seafood.

At Asda, the Issas and TDR Capital swiftly announced plans to sell off the supermarket’s petrol forecourts to the brothers’ EG Group after taking over, while its warehouses are set to be sold off and leased back.

Morrisons’ shares closed at about £1.78 each on Friday, valuing the company at £4.3billion.

CD&R has offered £2.30 per share but insists there is ‘no certainty’ a formal bid would be made. In a statement, the supermarket said: ‘The board evaluated the proposal and unanimously concluded that it significantly undervalued Morrisons and its future prospects.’

It was speculated yesterday that the bid for Morrisons could trigger a rival bid from Amazon.

The internet shopping giant already partners with the supermarket to deliver groceries and there have previously been suggestions that it could mount a takeover.

Meanwhile, potential private equity buyers of Sainsbury’s or Tesco would have to dig even deeper into their pockets. Sainsbury’s was valued at £5.8billion yesterday, while Tesco was at £17.2billion. Marks & Spencer was valued at £2.9billion.