Sat. May 28th, 2022


More stores, new products, better brands and expanded e-commerce will help generate the additional profits needed to support Wm Morrison’s heavy debt following its takeover by private equity, according to Sir Terry Leahy.

The former Tesco CEO is a longtime advisor to Clayton, Dubilier and Rice, the US private equity group that surpasses SoftBank-affiliated Fortress to acquire the UK’s fourth largest supermarket chain last year. He is now chairman of the company.

“We will be very careful to ensure that the way the business is financed offers a lot of liquidity and flexibility if the environment changes,” Leahy told the Financial Times.

“People can be reassured by CD & R’s approach to business. . . it’s quite unique in that it has business executives like me rather than just financiers. It brings an understanding of the businesses in which we operate. ”

He said four-fifths of the firm’s revenue had historically come from growth in sales and operating improvements, indicating its record at UK discount retailer B&M and French furniture retailer BUT. “We do not think it will be any different with Morrisons,” he said.

In what is likely to be the UK’s biggest high-yield debt issue, the company will needs to refinance more than £ 6 billion of short-term loans taken out to help finance the £ 10bn acquisition at a time when bond yields are rising.

Some in the credit markets have expressed concern that heavy debt could affect Morrisons ‘ability to respond to an expected knock on consumers’ spending power and higher food price inflation. Operating data indicates that it has lost market share in recent months.

Even if the company can secure terms similar to those offered to Asda last year, a larger competitor that also has a large debt burden, Morrisons’ annual interest bill will rise sharply.

While Leahy declined to comment on the progress of the refinancing, he said a broad-based increase in profit would help offset higher borrowing costs. “What we have seen is that the industry and Morrisons are gradually restoring their profitability.”

“These are very small things with retail, but in a relatively large business, those things add up,” he said, referring to opportunities to open more stores “in areas where it is not currently represented”, online expand and improve efficiency and product development in its significant food manufacturing business.

Leahy said he does not think it is necessary for the company to change its strategy into either e-commerce, where it is heavily dependent on partners such as Ocado and Amazon, or convenience. It does not operate its own local stores, but supplies McColl’s and several gas station operators under wholesale agreements.

He added that Morrisons can expand its retail operations in the forecourt, whether or not CD&R retains ownership of Motor Fuel Group, which it acquired in 2015. MFG operates more than 900 filling stations, but Leahy has not denied recent reports that the asset may be sold soon.

A customer in the central aisle of a Morrisons supermarket
Terry Leahy wants to open more stores in areas where Morrisons is not currently represented © Chris Ratcliffe / Bloomberg

“As usual, we hold a range of options [for MFG] is being reviewed, but we have learned a lot about retail in the forecourt and we feel that in any scenario that knowledge will be beneficial to our investment in Morrisons, ”he said.

However, he declined to comment on the possible sale of some of Morrisons’ assets over the commitments made during the bidding process. CD&R promised last summer to hold Morrisons’ headquarters in Bradford and said it “did not intend to engage in any material retail sales and leasing transactions”.

This still leaves room to offload some stores or warehouses and production facilities in an effort to reduce lending, as happened at Asda after its acquisition in 2020 by EG Group.

Although its final offer was 61 percent above Morrisons’ undisturbed share price and nearly a quarter higher than its opening bid, Leahy said CD&R paid a “fair price” for the company.

The pandemic has disrupted its recovery, he added, while recalling previous price wars associated with concerns about the challenges of discount sellers and e-commerce means “the performance and prospects of the business are not fully reflected in the share price”. .

“Morrisons has always been the business we were interested in. We knew the management, we were very impressed with what they did, and we liked the strategy with a clear focus in the market.”

He added that the competitive threat from Aldi and Lidl has diminished. “We are probably past the peak of the disruptive effect of discount sales. . . supermarkets have learned how to compete with them. ”

Leahy was also full of praise in his praise for David Potts, the Morrisons’ CEO with whom he previously worked at Tesco, and dismissed the idea that Potts might leave once the acquisition was completed.

“After talking to David, he is very excited about the future with Morrisons and wants to be a part of it.”



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