The pandemic has not deterred Canada’s CPP Investments from joining the multi-billion pound bidding war for British supermarket chain Morrisons, as retail revives and investors look to growth in both real estate values and online grocery sales.
This week, the board of directors agreed to a GBP6.3 billion (US$8.7 billion) takeover of the UK’s fourth biggest supermarket group by a consortium led by SoftBank’s Fortress Investment Group and including Canada’s biggest public pension fund, and Koch Industries subsidiary Koch Real Estate Investments. CPP Investments could be adding at least GBP1.5 billion to its UK portfolio, which is currently estimated at GBP13.6 billion. The bid beat a rejected offer of GBP5.5 billion from private equity group CD&R.
CPP has a respectable sized portfolio of real estate in the retail sector. In December, it bought Manchester’s Trafford Centre. It had provided the previous owner Intu with a GBP250 million loan secured against the asset. However, following Intu’s collapse last June as retail tenants were unable to pay rent and no viable bids were received, the Canadian fund took control of the shopping center, which is one of the top five biggest in the UK. CPP also has investments in London’s Westfield Stratford as well as Birmingham’s Bullring and Grand Central shopping centers. Altogether, its estimated total investment in UK retail real estate exceeds US$1.5 billion to date. The Morrisons’ acquisition could double its exposure.
The competition for the chain by private equity investors has fuelled fears of job losses and store closures. The publicly listed will need 75% of shareholders to agree to the takeover, but one of Morrissons’ top 10 shareholders Legal & General Investment Management has urged the board not to allow a takeover “for the wrong reasons”, warning that the chain could be burdened with huge debt. The Unite trade union has also called for urgent talks and demanded “unbreakable guarantees” that there will be no job losses.
Morrisons has a significant real estate portfolio worth around GBP5.8 billion and owns 87% of the freeholds of its stores. An investor may be tempted to sell and lease back to generate cash, which could undermine long-term earnings if the company is saddled with high rental costs. However, the consortium says it does not envisage any sale and leaseback transactions.
However, investors may not be primarily attracted to just the real estate value, which appears attracted as asset prices have plunged in the sector, but the potential of Morrisons’ online grocery business. Supermarkets have managed to ride out the pandemic storm with e-commerce enabling them to capitalize on their integrated supply chains. In May, Morrisons reported revenue of GBP17.6 billion for the 52 weeks to 31 January 2021, with group like-for-like sales (excluding fuel and VAT) up 8.6%, but GBP290 million of Covid-related costs led to pre-tax profit plunging 51% to GBP201 million. Online sales tripled during the year, with capacity up fivefold.