Shares in Morrisons surged as much as 33% today on hopes that US private equity firm Clayton, Dubilier & Rice (CD&R) might raise its proposed offer for the British supermarket group or flush out interest from other suitors.
Morrisons, Britain's fourth-largest grocer by sales behind market leader Tesco, Sainsbury's and Asda, on Saturday said it had rejected a proposed cash offer from CD&R.
The company said the offer of 230 pence per share, equating to £5.52 billion, "significantly undervalued" the group and its future prospects.
Under British takeover rules CD&R has until July 17 to announce a firm intention to make an offer.
Rivals Tesco and Sainsbury's rose 2.4% and 4.2% respectively on hopes that the whole sector could be in play, analysts said.
Including net debt of £3.17 billion, CD&R's offer gives Morrisons an enterprise value of £8.7 billion.
Analysts expect CD&R to assess investor reaction before deciding on its next move. Silchester is Morrisons' largest investor with a 15% stake, Refinitiv data shows.
Morrisons has a partnership agreement with Amazon and there has long been speculation that the online shopping giant could emerge as a possible bidder.
CD&R's approach underlines private equity's growing appetite for UK supermarket assets, attracted by their cash generation and freehold assets.
Zuber and Mohsin Issa in February joined forces with private equity firm TDR Capital to purchase a majority stake in Asda from Walmart in a deal valuing the UK supermarket group at £6.8 billion.
In April, Czech billionaire Daniel Kretinsky raised his stake in Sainsbury's to almost 10%, fuelling bid speculation.
Industry executives and some sector analysts believe the stock market has failed to recognise the inherent value in Britain's listed supermarket groups.
They argue that if equity markets do not value them appropriately, acquirers will.
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Who wants to buy Morrisons and why?
"There's a sense of value investors want a very binary story about knuckling down, keeping capex to a minimum and just becoming a cash machine," one senior supermarket executive told Reuters.
While sales have soared at all British supermarket groups during the coronavirus crisis, their profits have fallen because of the huge extra costs incurred.
Meanwhile, the US private equity firm's pursuit of Morrisons has set up an intriguing clash of former Tesco colleagues.
CD&R is being advised by Terry Leahy, the man who transformed Tesco into Britain's dominant supermarket group and the world's third-largest retailer as chief executive for 14 years to 2011.
The private equity firm's offer pits him against Morrisons chairman Andrew Higginson and CEO David Potts, two of Leahy's closest lieutenants at Tesco.
Higginson spent 15 years on Tesco's main board, first as finance and strategy director and later as CEO of the company's retailing services business before leaving in 2012.
Potts joined Tesco as a 16-year-old shelf-stacker before working his way up to become CEO of Tesco's Irish business, its UK retail stores business and then CEO of Tesco Asia.
He left in 2011 after being passed over for Leahy's job.
That job went to Philip Clarke, who was sacked in 2014, shortly before an accounting scandal plunged Tesco into its biggest crisis, raising questions over Leahy's legacy and tarnishing his reputation.
Potts and Higginson are not the only Tesco alumni to have ended up at Morrisons.
Finance chief Michael Gleeson and Trevor Strain, Morrisons' chief operating officer and the hot favourite to succeed Potts, were also at Tesco during the early stages of their careers.
