Earlier this month British grocer Morrisons rejected a £5.5bn takeover bid by US Private Equity firm Clayton, Dubilier & Rice. The UK’s fourth-largest supermarket, with 118,000 staff, said the offer « significantly undervalues » the firm.
With the offer being just at the current market cap, could there be a case to support this claim and justify a higher valuation? Let’s dive into some of the basics:
– Revenue growth is forecasted to remain at low single digits for the next few years
– Net income margin is expected to remain around 2%
Assuming this relative stability in the P&L, a DCF method yields a valuation range nearly 3x the current market cap (and CDR bid), giving credence to the firm’s pushback.
But looking at market based methods we notice that the trading multiples for Morrisons’ peers would suggest a valuation barely half of its current market capitalization; perhaps hinting why the bid didn’t carry a significant premium.
What is your take on the situation and do you think the offer was adequately priced? (link to the valuation)