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On the evening of 19 August 2021, Wm Morrison Supermarkets plc (Morrisons) that it had agreed the terms of a £7bn recommended cash offer with US private equity firm Clayton, Dubilier & Rice LLC (CD&R). The agreed offer follows from CD&R’s failed approach in June 2021 which saw the board reject a £5.5bn approach due to a significant undervaluation of Morrisons and its future prospects (see: ). The offer also represents the latest development in the bidding war for Morrisons, with the directors now rescinding their recommendation for the previously agreed upon £6.7bn offer with the Fortress-led consortium (see: ) and adjourning the shareholder meetings which were due to be held this week. The consortium quickly to news of CD&R offer, noting that it was considering its options and urged shareholders to take no action in relation to the CD&R offer and that a further announcement would be published in due course.

Morrisons’ share price closed at £2.91 on 20 August 2021, above CD&R’s offer of £2.85 per share, suggesting market confidence that the bidding war is far from over. Neither party has declared their offer to be final, and should the back and forth between CD&R and the Fortress-led consortium continue, the Takeover Panel may intervene (as seen earlier this month in the battle between Philip Morris and The Carlyle Group for Vectura) and establish an auction procedure for the resolution of the competitive bids. 

On 24 August 2021, Morrisons published a from its pension scheme trustees which are responsible for 85,500 members in regards to the bids from CD&R and the Fortress-led consortium. Though the pension schemes are in surplus on an ongoing funding basis and benefit from security in the form of freehold properties held within a pension funding partnership structure, the funds are dependent on the continued participation of Morrisons to support members’ benefits and do not have sufficient resources to buy out the scheme benefits with annuities from an insurer. The long-term objective of the schemes would be to achieve full funding on a buy-out basis in less than ten years. The trustees indicated that an acceptance of either the CD&R offer or the Fortress offer would materially weaken the existing sponsor covenant supporting the pension schemes unless additional security protection was provided. The hesitance of the trustees stems from the fact that both offers would involve the introduction of additional secured debt which would leave the creditors with a priority claim ahead of the pension funds as unsecured creditors, the related increased debt service burden and potential future refinancing and restructuring activity.

The current aggregate buy-out deficit of the Morrisons’ pensions scheme is estimated to be £800m. The trustees recommended that any mitigation provided by Fortress or CD&R should be settled before any shareholder meeting is convened in consideration of any offer for Morrisons. The shareholder meetings to approve the CD&R scheme are currently scheduled for the week commencing 4 October 2021. This coincides with the coming into force of the (a subscription to Lexis®PSL is required) on 1 October 2021, which will give The Pensions Regulator greater powers in its oversight of corporate transactions. The trustees have had ongoing discussions with Fortress since 3 July 2021 and noted a helpful introductory meeting with CD&R. In to the pension scheme trustees’ statement, CD&R noted that it looked forward to continue positive engagement with the trustees and accepted that the engagement is likely to extend to the appropriate mitigation package that would provide additional security to the schemes. 

Market Tracker will continue to monitor these transactions as they develop.