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Fortress, Apollo, and CD&R: Inside the private equity firms vying to buy Morrisons

·7-min read
File photo dated 19/06/2020 of Morrisons trollies. Investment giant Apollo has said it considering launching its own bid to buy Morrisons after the supermarket chain agreed a �6.3 billion private equity takeover offer on Saturday. Issue date: Monday July 5, 2021.
Morrisons is in the eye of the storm as private equity giants circle. Photo: PA

UK grocery group Morrisons (MRW.L) has found itself at the heart of a takeover battle between private equity giants.

Clayton, Dubilier & Rice (CD&R), Apollo and a group of firms led by Fortress have all expressed an interest in buying the supermarket chain in recent weeks. 

The contest started in earnest a fortnight ago when Morrisons publicly rejected a £5.5bn ($7.6bn) advance from CD&R. The approach sent Morrisons' stock soaring more than 30% as investors sensed a bidding war. 

The hunch proved right and on Saturday Morrisons said it had agreed a £6.3bn ($8.7bn) takeover by a consortium led by Fortress Investment Group. The approach sent Morrisons' stock soaring by more than 10%. 

Morrisons' month in the stock market. Chart: Yahoo Finance UK
Morrisons' month in the stock market. Chart: Yahoo Finance UK

Morrisons has almost 500 supermarkets across the UK and employs over 100,000 staff in the UK. It works as a supplier for Amazon's (AMZN) Prime and Fresh offerings in the UK.

Morrisons is seen as an attractive acquisition target because it owns a large amount of property in the UK, which can be borrowed against. Private equity firms typically like to leverage up their investments and use the funds either to invest in the core business or to take out as dividends.

Any takeover will be closely watched due to Morrisons role at the heart of the UK's food supply chain and its significant employee footprint. 

As the private equity elbow-barging heats up, many will be wondering who are behind the firms jostling for a piece of the UK supermarket scene and what they plan to do with it.

The front runners: Fortress

MILWAUKEE, WI - JULY 2: (L-R) Owners Wesley Edens (L) & Marc Lasry (2L) await for the official announcement of their new head coach Jason Kidd to the Milwaukee Bucks at BMO Harris Bradley Center on July 2, 2014 in Milwaukee, Wisconsin. NOTE TO USER: User expressly acknowledges and agrees that, by downloading and or using this photograph, User is consenting to the terms and conditions of the Getty Images License Agreement. (Photo by Mike McGinnis/Getty Images)
Fortress co-founder Wesley Edens, left, is a co-owner of the Milwaukee Bucks NBA basketball team. Photo: Mike McGinnis/Getty Images

Fortress Investment Group is currently the front runner to buy Morrisons. The investment manager is leading a consortium that has won the blessing of the supermarket's board to buy Morrisons for £6.3bn.

The terms of the deal will see Fortress, CPPIB — a Canadian pension fund — and a unit of Koch Industries pay 252 pence per share. The group has made a total of five approaches since the start of May and had been considering an approach since the end of last year, according to the FT.

Fortress has promised to support Morrisons' existing strategy, keep its head office in Bradford and maintain workers' pension rights. The bidders say they are not planning any sale and leasebacks of Morrisons' stores — a popular private equity move to unlock capital that can prove detrimental to a business in the long-term.

Read more: Morrisons takeover battle: Stock soars as Apollo enters the race

Fortress was founded in 1998 by banking and private equity industry veterans Wesley R. Edens, Rob Kauffman, and Randal Nardone. Fortress became the largest publicly listed private equity firm in the United States when it launched on the NYSE in 2007. It went private a decade later when Japanese money manager Softbank bought it for $3.3bn in cash in 2017.

Theranos Founder and CEO Elizabeth Holmes, 29, is photographed holding a nanotainer of blood at Theranos headquarters in Palo Alto, CA on Monday, June 30, 2014.  Holmes dropped out of the engineering program at Stanford because she had bigger plans: now 29, she's the founder of Theranos, a high-tech venture that aims to radically simplify health monitoring through blood analysis. (Photo by Martin E. Klimek/USA Today Network/Sipa USA)
Fortress is best known for backing distressed businesses, such as Theranos. Founder and CEO Elizabeth Holmes, 29, is photographed here holding a nanotainer of blood at Theranos headquarters in Palo Alto, CA on Monday, June 30, 2014. Photo: Martin E. Klimek/USA Today Network/Sipa USA

Fortress has around $53bn under management and is best known for pouring money into distressed companies. It previously courted controversy with reports that it was in talks to provide a loan to the Weinstein Company in 2017. It loaned $100m to failed medical startup Theranos, which had been on the verge of bankruptcy.

While Morrisons is far from a distressed entity, Fortress has also made investments in the supermarket sector. It previously invested in US supermarket chain Albertsons and bought out Fresh & Easy, Tesco's failed venture into the US. 

Edens and Nardone, who both worked at BlackRock prior to founding Fortress, remain in leadership roles at the company. Edens is a keen sports fan who co-owns NBA finalist team the Milwaukee Bucks and owns a chunk of Premier League club Aston Villa.

Apollo: Will they, won't they?

Leon Black, Chairman, CEO and Director, Apollo Global Management, LLC, speaks at the Milken Institute's 21st Global Conference in Beverly Hills, California, U.S. May 1, 2018. REUTERS/Lucy Nicholson
Apollo cofounder and former chairman Leon Black speaks at the Milken Institute's 21st Global Conference in Beverly Hills, California, U.S. May 1, 2018. Photo: REUTERS/Lucy Nicholson

New York investment firm Apollo is the latest outfit to register interest in Morrisons. The company said on Monday it was considering making an offer.

Apollo is a private equity giant, with a reported $414bn of assets under management at the end of June 2020. Around 72% of its assets are in the credit business, meaning it lends money. Around 18% of its assets are in private equity and the remaining 10% are in real assets.

Many of Apollo's private equity investments are in the tech space. It counts the likes of security company ADT, recruitment website CareerBuilder, Cox Media Group, telecoms company Intrado and warehousing company Smart & Final among its portfolio, as well as more left field investments like the University of Phoenix. 

Read more: European markets latest: FTSE 100 muted as Morrisons takeover battle brews

The New York-headquartered firm was founded in 1990 by Leon Black, Josh Harris and Marc Rowan, alumni of the infamous Wall Street investment bank Drexel Burnham Lamber. Drexel made huge profits pioneering "junk bonds" in the 1980s before being bought down by the SEC. 

Apollo's style is best summed up as a strong stomach for risk — many of the firm's early deals came from opportunities other firms wouldn't touch. 

“You’d either make money on the debt [or] you would end up owning the companies," the Financial Times quotes Black as saying.

Apollo's swashbuckling style and bold bets earned it a huge reputation on Wall Street and last year Bloomberg called Black "the most feared man in the most aggressive realm of finance."

Black ran Apollo until earlier this year when he was forced to step down as chairman over his links to disgraced financier and convicted sex offender Jeffrey Epstein. Black paid Epstein $158m for family office tax-related advice between 2012 and 2017. 

Harris recently announced plans to leave Apollo, meaning current chief executive Marc Rowan is the only one of the three cofounders still within the business.

Disclosure: Apollo Global Management has agreed a deal to buy Yahoo Finance UK as part of a broader transaction with current owners Verizon. The deal has yet to close.

The return of CD&R?

English businessman Sir Terry Leahy, former CEO of Tesco, the largest British retailer, speaking at the annual Global Entrepreneurship Congress at the Arena and Conference Centre in Liverpool. Sir Terry stepped down as CEO of the company in 2010. (Photo by Colin McPherson/Corbis via Getty Images)
English businessman Sir Terry Leahy, former CEO of Tesco, the largest British retailer. Photo: Colin McPherson/Corbis via Getty Images

Morrisons' original suitor was CD&R, which launched a failed bid last month. 

Founded in 1978 and jointly headquartered between New York and London, CD&R is one of the oldest private equity houses in the market. It has more than $30bn invested in businesses across multiple industries and boasts an aggregate transaction value in excess of $140bn.

As of December 2020, CD&R had 34 portfolio companies including the MFG chain of petrol forecourts. Its companies employ 225,000 people and have a combined turnover of $60bn.

Unlike Fortress and Apollo, which are largely run by financiers, CD&R likes to recruit its executives from top companies. It boasts of hires from Disney, Emerson Electric, GAP, GE, IBM, PepsiCo, Procter & Gamble and Unilever.

Former Tesco (TSCO.L) chief executive Sir Terry Leahy is a senior advisor to the firm and is likely to have had a hand in the Morrisons offer. At Tesco, he helped it reach profits of £2bn in 2005 and grew the supermarket's market share from 20% to 30%.

Analysts think CD&R could return to the table with an improved bid to win over Morrisons now that Fortress has struck a deal.

CD&R's £5.5bn bid was turned down last mnth because Morrisons said it "significantly" undervalued the firm. People close to the transaction told the FT CD&R was likely to push ahead with another offer.

"We would expect CD&R to be able to generate bigger synergies with Morrison," Barclays analysts said this week.

Watch: Morrisons supermarket agrees to £6.3bn takeover bid

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