The blockbuster £5.5bn bid for Morrisons from private equity giant Clayton, Dubilier & Rice could prove the catalyst for a fundamental rerating of a sector the City has failed to reward for its stellar pandemic performance, according to analysts.
While the market waits to see if CD&R comes back with an improved offer for the Bradford-based grocer – it has until 17 July to do so – the rejected bid promoted a share price surge across the sector.
Morrisons shares jumped by 34.6% to 240.2p on Monday after news of the bid broke and it notably held on to those gains through the week, edging back to 234.4p by Thursday lunchtime.
The shares had been trading around 4% below pre-Covid levels, but are now up 26%.
Rival supermarkets also joined in the fun, with Sainsbury’s up 3.8% to 270.1p on Monday and Tesco up 1.7% to 225.6p. Ocado also jumped 4% on Monday to 1,957p.
JP Morgan called into question rationale behind the bid: “As was the case with Asda, a potential change of owner would not solve the challenges of the industry nor those of the company.”
But other analysts suggested these challenges had been overstated and that the bid could lead the City to reassess valuations across the sector. “This approach is a result of how slow the market has been to reflect the improved prospects and management of food retailers in recent years and the relatively constructive outlook faced by the UK sector,” argued HSBC.
Similarly, Shore Capital pointed to a “structurally narrower” price gap to the discounters, the tailwind of food price inflation and the shift in online from being “an earnings millstone to one of share gain”. “Ongoing investor interest in the grocers should be expected if equity capital markets do not appropriately value a share in the eyes of other capital pools,” the broker stated.
Supermarket share prices have previously been constrained by weak profitability despite the Covid-driven spike in sales, and expectations of a subsequent slowdown in growth.
This week Kantar revealed grocery sales fell back 1.6% in the 12 weeks to 13 June as the reopening of pubs and restaurants reduced spend at UK supermarkets. Sainsbury’s was the only one of the mults in growth (of 0.4%), with Asda down 0.6%, Tesco 0.8% and most notably Morrisons down 1.5%.
Hargreaves Lansdown cautioned: “The grocery market might look hot right now, given the surge in online sales over the past year, but there are already indications it’s begun to cool… As shoppers fill fewer baskets, there is likely to be further competition on price which could eat into margins at a time when continued investment is needed to expand online capacity.”