Amateur property developers often

dream of finding an undervalued property than can be fixed up and quickly turned for a nice profit. In the past few weeks several private equity groups appear to have been eyeing ­Morrisons in the same vein.

There has been speculation that a consortium of private equity firms - CVC, Permira and Texas Pacific - is considering a bid for Morrisons. But is there any substance to the rumours?

The retailer has struggled to integrate Safeway, posted its first-ever annual loss and only recently completed a protracted CEO search. While it did report a 6% rise in turnover in its most recent trading update, Tesco continues to increase market share, Sainsbury is resurgent and Asda is digging in for a price war.

Analyst Sanjay Vidyarthi of Teather & Greenwood says he struggles to see the upside of a takeover: "From our view the valuation of shares is too high. It can possibly be turned around but it would take a great retailer with a strong team and long time frame, maybe three to five years."

So where is upside for a private equity investor? One theory that has been floated is that Morrisons has untapped value in the 92% of its portfolio that is freehold and long lease. However, say analysts, it's not an easy win. Greg Lawless of HSBC says: "That strategy is attractive on paper, but this particular business has very thin margins, so you might not want to do that, as you would effectively have high rents to cover."

Another potential source of value is the unique vertically integrated food production operations. The company operates fruit and veg packing and processing facilities in and outside the UK. It also owns a meat-processing business and Farmers Boy, another production arm, and a business which exports fruits and flowers to the UK. These could all potentially be sold off in a restructuring move.

However, the value of these operations is hard to judge. Lawless says: "It does help gross margins, but on the other hand these operations add other costs."

Another possible incentive is the chance to improve operating margins in the core retail business. Morrisons' margin was 0.9% in 2005/2006, a number the retailer expects to rise to 2.1% in two years. This, several analysts contend, is a conservative estimate.

Lawless says that Morrisons is undervalued and that there's scope to improve operating margins further with better ranging, staffing and logistics. "Morrisons used to make 6% margins as a standalone, he says. "But wages and distribution costs are higher now. Our position is that there is a lot of fat in this business."

The question remains as to whether Morrisons is a good candidate for a private equity takeover. To begin with it would be difficult to co-ordinate a bid of this size between three private equity firms, all of whom will probably want different exit strategies. There is also talk of a potential price of 220p to 240p. Even HSBC, which is very optimistic about the business, doesn't think that a long term price above 240p is justified.

So the talk of a bid may just be that - talk. Vidyarthi points out: "When Sainsbury was struggling, we heard the same sort of talk, but it wasn't true either." This sort of talk, he says, tends to swirl around when major retailers struggle, but most never reach an advanced stage and this may be the case here. But while Vidyarthi is doubtful that any private equity groups would have the patience to sit out a three to five-year recovery job at Morrisons, he does admit: "you can never say never".