Britain’s fourth-largest chain of supermarkets, had humble beginnings, as a West Yorkshire market stall selling butter and eggs. But Morrisons has grown to 500 locations and is in the center of a 7 billion pound war between U.S. Private Equity firms.
HULT Private Capital and its Private Equity division are searching for new U.K. takeover opportunities, which has become a near-weekly occurrence in Britain, where domestic companies are gobbled up with Private Equity investment, flush with cash. HULT Private Capital is a local London-based firm competing with other P.E. firms, which according to Pitchbook, have $1.3 trillion in unallocated capital in the industry they call dry powder. This resource makes them eager to find bargains in the U.K., where valuations have lagged since Brexit and further hurt by the pandemic.
According to Dealogic, P.E. has already concluded 39 bids for British companies, only two short of 2020. John Hudson, a senior manager at HULT Private Capital, with years of U.K. Private Equity experience, stated, “this year has been unstoppable, we have seen Blackstone buying both property firm St. Modwen and the private jet service Signature Aviation.”
This was just a start; U.S.-based K.K.R. purchased infrastructure company John Lang and Carlyle nearly got the vape company Vectra, only to be beat out by Phillip Morris, the tobacco giant.
HULT Private Capital is fighting against the likes of Blackstone, the world’s largest private equity firm, which is growing its London office beyond the current 400 employees, seeing Britain as a European gateway, and despite Brexit, so far has put $20 billion into the U.K.
HULT Private Capital sees the U.K. as ripe with opportunity, and being a U.K.-based firm may be positioned perfectly with lawmakers worried about foreign owners willing to sell off assets. The U.K.’s Labour Party parliament members wanted to know if Morrisons, the “critical food supplier” and its 120,000 employees, could be protected when they heard the first rumors of the Clayton, Dubilier &Rice (CD&R) bid for Morrisons. Fearing Morrisons would be indebted and stripped of assets with staff pushed to the curb.
Even more worrying eyebrows were raised in the defense industry when Private Equity looks to buy British firms that work with the government. Meggitt, a supplier of military plane parts and weapon systems, is the target of two Ohio-based firms. The British government’s reaction was a statement of “active interest” at any potential takeover. This was soon followed by Kwasi Kwarteng, the British Business Secretary, stating in a tweet, “foreign investment must not threaten our national security” and ordering the U.K. competition watchdog to look at a bid for Royal Navy Supplier, Ultra Electronics, on national security grounds. A British firm Cobham had made the bid, but Cobham had been purchased by Advent in 2020; however, Kwarteng was a bit off in his statements because they had since split.
The attraction of U.K. firms is quite simple, their price. The London Stock Exchange’s FTSE 100 constituents’ price-to-earnings ratios, which is a simple valuation measure, are much lower than the price to earnings of the U.S.’s S&P500. According to Bloomberg data, the index’s returns have lagged for over five years, with total returns in this time of only 26%. The S&P has seen a run-up of 125% in the same five-year period. Additionally, the pound dropped with Brexit and still has not fully recovered. Finally, the L.S.E. is not tech-heavy which makes British stocks cheap and susceptible to takeovers. According to HULT Private Capital’s Amrit Singh, “in recent years, the digitization of industries is where structural growth in the global market has come from. The U.K. lacks this, with the FTSE 100 relying on companies in legacy industries that investors dislike, retail, mining and oil, and banks scarred by the crisis.”
Private equity does have a storied history in the U.K; Debenhams had been taken over by three U.S. P.E. firms in 2003. In their three years of ownership, the investors made millions but saddled the company with over £1 billion in debt. Debenhams finally shut its doors in May, with the debt obligations combined with the pandemic and online shopping growth being the leading causes.
Being a locally based P.E. firm HULT Private Capital is in a perfect position to avoid the governmental and business scrutiny that deals attract when bids from foreign P.E. firms are made. The Morrisons deal has attracted the attention of major British investors who in July opposed the £6.3 billion offer from SoftBank-backed Fortress, which Morrisons’ board was ready to accept after rejecting a CD&R bid.
Investors and politicians were concerned that Morrisons would be sold too cheaply. Morrisons owns much of the real estate it occupies, and with tight control over its supply chain, it produces much of the products it sells, and owns the meat processing plants where it obtains some of these products as well. This structure meant Morisons owned assets were more valuable than the stock price reflected. Accusations of British companies being undervalued by investors was the result.
This had a positive effect for the shareholders, with CD&R making a higher £7 billion offer which was 63% above the market value bid made two months prior. This pleased corporate finance and stewardship head at M&G, Rupert Krefting, whose firm owns 1% of Morrisons’ shares, who stated, “We’re heading in the right direction.” The acceptance of the recent offer will be voted on in October.
This increase in private equity deals is putting public equity investors searching for the next company to be in the spotlight. As the yanks battle for Morrisons, another supermarket Sainsbury’s, recently became the topic of speculation, with its stock price jumping 16% on the first trading day after the news was released.
Having the inside track to British firms while also being shielded from the claims of those worried that foreigners are dismantling Britain, HULT Private Capital is in a position to provide unique opportunities to its investors. HULT’s Mark Johnson had this to say, “The time is now to grab these great British companies that are still valuable and will provide our investors with superior returns. While the pound stays weak and L.S.E. stocks remain undervalued, the U.K. will continue to be P.E.’s main target.”
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