When bidding finally closed last weekend, the auction of Morrisons turned out to have been less exciting than many of the speculators had been hoping. Clayton, Dubilier & Rice, the original bidder, walked away with the prize at 286p a share, less than the shares were trading at in the week before the auction closed. At £7bn, whether the retailer will turn out to be a great investment remains to be seen.
Terry Leahy, the former Tesco boss, will be advising the new owners, and he has a formidable record in retailing. If anyone can make Morrisons a success, Leahy can. Yet it is hard to see how it can be magically transformed. Morrisons has languished in fourth place in its sector for the last 20 years and has no meaningful brand outside of its Yorkshire heartlands. The real lesson of the bid is that, if Morrisons is a target for private equity, then so is just about every firm on the FTSE 100.
The wave of bids washing over Britain
No one thinks the buyouts will end with this takeover. The UK is witnessing wave after wave of private-equity firms buying out major British companies. In the first half of this year, the buyout firms spent $45bn in the UK, with a total of 38 acquisitions, ranging from John Laing to G4S. That is double the amount spent in the first half of 2020 or indeed any of the last ten years. Sainsbury’s? Tesco? Either of them could be next. It is not hard to see a media company being bought, such as ITV or Pearson. Or indeed, one of the banks such as Lloyds. At this rate, in another few years there may be hardly any major companies left on the London market, and the entire UK economy will belong to a handful of private-equity firms based in New York and Tokyo.
Plenty of investment institutions in the City will feel uneasy about that. After all, there won’t be many companies left for British investors to put their money into. And, of course, the private-equity firms don’t have a great record. Lots of businesses are drained of cash, starved of investment, then dumped back onto the stockmarket a few years later. And yet the City also has a very easy way of bringing the waves of takeover bids to a sudden stop. Simply start valuing British equities properly.
There is no great mystery about why there are so many takeovers right now. It is because the UK market is cheap compared with the rest of the world. America’s S&P 500 and Europe’s Stoxx 600 have risen 65% and 18% respectively in the last three years; the FTSE 100 has fallen by 8% over that time. It trades on just 12.6 times forward earnings, compared to 21 times and 16 times respectively for those two rivals. In other words, if you want a bargain, and private-equity firms are always looking for one of those, then Britain is the place to come.
Let’s get the FTSE to 10,000
On top of that, our market is relatively open compared to most others. And, although it might not look like it right now, with fuel shortages across the country and labour shortages snarling up supply lines, the UK has good growth prospects. It is recovering from the pandemic as fast as most of its major rivals, it will soon have recovered from the disruption of leaving the EU, and it has plenty of new businesses and levels of venture-capital investment far higher than anywhere else in Europe.
The City can’t – and shouldn’t – do anything about it being an open market. It would be crazy to put up barriers to takeover bids. But it can fix the fact that UK equities are so cheap by increasing the weighting of the UK in the typical portfolio, and especially in the giant pension funds that dominate the market.
It is time the UK was re-rated and put on a par with other major markets around the world. If the FTSE 100 was at 10,000 we wouldn’t see any more takeover bids. They would be way too expensive. That may seem a distant prospect, but that is simply a measure of how poorly the UK market has done over the last 20 years. Once it hits those levels, and there is no reason why it shouldn’t, the wave of takeovers will stop dead in its tracks – but until it does, they will keep on coming.