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Analysis: Morrisons woes continue as its plays catchup

A NEW STRATEGY, a £5bn debt deal and a cyber attack that has left the supermarket’s payroll data compromised all add up to a miserable month for all associated with the company.

Indeed, its woes wiped some £2.6bn of the value of the UK’s supermarkets as it looked to aggressively take on discount rivals Aldi and Lidl on price. Shares in Morrisons itself dropped 12% on Thursday to its lowest level since 2008 (before a mdest recovery on Friday), while Tesco and Sainsbury’s were hit 5% and 8.5% respectively.

The Morrison family, which own a 9.5% stake, has approached buyout firms to gauge their interest in taking the business private after a difficult Christmas trading period.

In January, the retailer issued a profit warning and has struggled to keep up with its competitors because of previously operating without an online offering.

“The size of the transaction, which could get as high as £10bn, could require a number of private equity players to team up, given the size of the equity cheque needed,” a senior leveraged loan banker told Reuters.

Morrisons lost £176m last year, while it expects underlying profits in the coming year to be around half those seen in the year before – below £375m. All this, and we haven’t even got to the one-off costs of £903m, which included write-downs on the value of its stores and its 2011 acquisition of online children’s wear retailer Kiddicare, which it now plans to sell in the following poor financial performance.

Following a property review, Morrisons plans to retain 80% of its £9bn estate as freehold. Currently it owns 90% of its store estate, the Evening Standard reports.
Despite that litany of issues, chief executive Dalton Phillips suggested it was indicative the market environment rather than anything specific to his employer.

“The strategy we are announcing today is a bold and comprehensive response to the fundamental structural changes that are taking place in grocery retail,” he said.

“We are significantly reducing our cost base and will invest £1bn into our proposition over the next three years, to improve our value even further and to defend and strengthen our competitive position. At the same time we will exit non-core activities, significantly reduce our capital expenditure and deliver improved operating cashflow and return on capital employed.”

He went on to emphasise Morrisons would not become a discounter in its own right, but acknowledged an “overlap” and the need to make quality and fresh food worthwhile.

Multi-track strategy

There are plans to invest in increased efficiency, lower prices, more targeted promotions and a Morrisons loyalty card, so it may track the shopping habits of its customers.

It’s something that will see competitors including Tesco and Asda watching on with interest, and could lead to responses further down the line.

“Other supermarkets cannot stand idly by and let a competitor steal a march and so for Asda and Tesco in particular there may be concern as to what Morrisons is doing,” Shore Capital analyst Clive Black told the Telegraph.

But despite the drastic repositioning on the cards, the markets do not appear to be sated.

“Morrisons is only just catching up with the developments of five to ten years ago – online, loyalty card, convenience etc – let alone the changes happening now. And there seems little urgency,” independent analyst Louise Cooper told the BBC.

As if to emphasise the point, the supermarket fell victim to a hacking attack which saw information including 100,000 employees’ bank details published online and sent to a newspaper.

“Initial investigations suggest that this theft was not the result of an external penetration of our systems,” the company said in a statement. “We can confirm there has been no loss of customer data and no colleague will be left financially disadvantaged.”

“As if things weren’t bad enough for Morrisons,” the BBC’s Emma Simpson said. “The timing could be a complete co-incidence, but one possible theory could be that this was an attempt by a disgruntled employee to embarrass the company.”

 

In Brief: Debt deal may be precursor to potential sale

The £5bn debt deal struck by the Morrison family could be signal for private equity firms to make their bids, analysts suggest.

Despite the issues besetting the UK’s fourth-largest supermarket and its poor sales over the past year, its property assets make it an attractive proposition for private equity buyers after precious little M&A activity over the last 12 months.

That said, the size of such a deal may mean that they have to work together, Reuters reports.

Bradford-based Morrisons, which is the UK’s fourth-largest supermarket operator, was founded in 1899 and listed on the London Stock Exchange in 1967.

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