Beleaguered supermarket Morrisons becomes private equity target

Private equity companies could be set to pounce on beleaguered supermarket Morrisons as it prepares to bow out of the FTSE 100 tomorrow.

City analysts believe the FTSE quarterly review, which is likely to see the grocery chain slip out of the UK's premier stock market index, coupled with Kantar data showing a small uptick in sales, could ignite interest.

Edmund Shing of the Opportunité Idle Investor Fund said: "If we're finally seeing some stability in sales, that could be a sign that a private equity group might be willing to team up with the family."

The Morrison family, headed by Sir Ken, still holds 10% of the company and there have been persistent rumours linking it with potential bids for Morrisons in conjunction with private equity. Last year it was reported that CVC Capital Partners, Carlyle Group and Apax Partners had all run the rule over Morrisons.

"Private equity firms have a shed load of money to invest and there is a big shareholder in the form of the Morrison family to team up with. As long as the sales keep sliding, people think it's a bottomless pit, but when you have stabilisation, it could be an initial sign of change. New management could be stabilising the ship, and the investment is going in now, so private equity are thinking some of the hardest slog is already done," Shing added.

The ship has been sinking fast of late.

Morrisons reported a pre-tax loss of £792m ($1.2bn, €1.09bn) earlier this year, has regularly lost market share and was forced to replace chief executive Dalton Philips with David Potts to stop the rot. The company's troubles have been linked to its delay in entering the convenience store market and launching online shopping, as well as a lack of presence in London and the South East. As with its rivals, Morrisons has also been embroiled in a bitter price war that has eroded margins.

But the Kantar data, which showed Morrisons grew sales 0.1% in the 12 weeks ending 24 May 2015, offers a glimmer of hope.

Anybody looking to acquire Morrisons will find its share price significantly lower than two years ago, when it stood at 256p. It is now trading at 172p. This in itself would make it an attractive proposition to private equity. But even more so, Morrisons still owns the vast majority of its own properties, which significantly adds to its value in the eyes of investors.

But can the new chief executive turn Morrisons around?

Clive Black of Shore Capital said: "Since the start of the year Morrison's has embarked upon substantial change aimed at improving its 'customers shopping trip'. It is clearly still very early days in Mr Potts' tenure but we sense he is bringing a deep rooted and fundamental change to Morrison's that is for the better."

Potts has shaken up the board, with seven out of the ten management board either leaving or changing roles. He has also recruited ex-Tesco man Darren Blackhurst as commercial director. Most importantly, he has embarked on a review of the entire organisation.

"The new chief executive has cut out an ineffectual queue management system, ‎ordered a spring clean of the stores and more importantly, we sense, embarked upon a deep rooted review of operations. Such work takes time to determine, even for a wise hand in a fast changing market, and as such we expect an ongoing programme of self-improvement, revolving around, category-by-category, range-by-range, store-by-store reviews," Black added.

For its part, Morrisons will update the market on its progress at its interims in September. Private equity might not wait until then to strike.