PE on the prowl

The barbarians are back at the gates, and it looks like the retail sector is a target for change. As many have been predicting since the Covid-19 pandemic first struck, a combination of depressed share prices and piles of dry powder make a wave of private equity activity likely.
In the crosshairs currently is WM Morrison, which has reported interest from private equity firm Clayton, Dubilier & Rice. If a deal went ahead it would represent one of Britain’s biggest leveraged buyouts since the 2008 crisis. The private equity firm put in an initial highly conditional offer of 230p per share for the supermarket, which has so far been rejected with Legal & General Investment Management telling the FT that the bid was ‘too low’ and that Clayton Dubilier & Rice would ‘bring nothing’ to the company.
However, the news saw Morrison’s share price soar by 30%; bad news for the investors that had short positions the stock. Prior to the PE interest in Morrison’s becoming public, BlackRock investment Management had the biggest short position at 2.29%, although it did reduce this by 0.7% in April this year. Citadel Europe was next with 0.8% and then GLG Partners 0.53%. Keep an eye on these going forward.
On the flip side, we’ll also be looking out for hedge funds going long in Morrison’s using derivatives. There was a huge position in G4S earlier this year when it was caught in a bidding war between two PE firms as part of the process of being taken private.
Although Morrison’s was recently relegated from the FTSE 100 it is hardly a business that is in a tight spot. But it is part of a group of around a dozen UK-listed businesses that private equity firms have been hunting since the start of the year. As the FT notes, this is the highest number of takeover targets since 1999. There were just four in the same period last year and three in 2019, figures from Refinitiv show.
It is not just Morrison’s that is raising concern that the private equity hunters are offering bids below reasonable value. Janus Henderson says US buyout firm Blackstone’s GBP 1.2bn offer for St Modwen, a property company involved in the redevelopment of London’s New Covent Garden Market is a bad deal for shareholders.
Critics say that not only are private equity buyouts potentially a bad dead for shareholders, but private equity firms also benefit from leverage, tax benefits and lower requirements for financial, environmental, social and governance disclosure. Whether the shift from public to private is a secular trend remains to be seen.

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