Terry Leahy confident in Morrisons takeover as £6bn debt refinance looms

Sir Terry Leahy says more stores, new products, better branding and expanded e-commerce will help generate the extra profits needed to support Wm Morrison’s heavy debt following its private equity takeover.

The former chief executive of Tesco is a longtime adviser to Clayton, Dubilier and Rice, the US private equity group that outbid SoftBank subsidiary Fortress to acquire the UK’s fourth-largest supermarket chain. last year. He now chairs the company.

“We will be very careful that the way the business is financed provides plenty of liquidity and flexibility if the environment changes,” Leahy told the Financial Times.

“People can be reassured by CD&R’s business approach. . . it’s quite unique in that it has operating executives like me rather than just financial ones. This brings an understanding of the businesses in which we operate.

He said four-fifths of the company’s returns have historically come from sales growth and operational improvements, highlighting his record at British discounter B&M and French furniture retailer BUT. “We don’t think it will be any different with Morrisons,” he said.

In what will likely be the UK’s biggest high yield debt issue, the company will need to refinance over £6bn of short-term borrowings taken out to help fund the £10bn acquisition at a time when bond yields are rising.

Some in credit markets have expressed concern that heavy leverage could affect Morrisons’ ability to respond to an expected squeeze in consumer purchasing power and higher food price inflation. Industry data suggests it has been losing market share in recent months.

Even if the company can secure terms similar to those offered last year to Asda, a bigger rival which also has a heavy debt burden, Morrisons’ annual interest bill is set to rise sharply.

Although Leahy declined to comment on the progress of the refinancing, he said a general increase in profits would help offset rising borrowing costs. “What we’ve seen is that the industry and Morrisons are gradually getting back to profitability.”

“There are a lot of little things with retail, but in a relatively large business, those things add up,” he said, citing opportunities to open more stores “in areas where there are is not currently represented,” to expand online and improve efficiency and product development in its large food manufacturing business.

Leahy said he doesn’t think it’s necessary for the company to change its strategy in e-commerce, where it relies heavily on partners such as Ocado and Amazon, or in convenience. It does not operate its own local stores, but supplies McColl’s and various service station operators under wholesale agreements.

He added that Morrisons could expand its forecourt retail operations whether or not CD&R retains ownership of Motor Fuel Group, which it acquired in 2015. MFG operates more than 900 gas stations, but Leahy does not has not denied recent reports that the asset may soon be sold.

Terry Leahy wants to open more stores in areas where Morrisons is not currently represented © Chris Ratcliffe/Bloomberg

“As is normal, we keep a range of options [for MFG] under review, but we have learned a lot about forecourt retail and believe that in any scenario this knowledge would be beneficial to our investment in Morrisons,” he said.

He, however, declined to comment on the possible sale of some of Morrisons’ assets beyond commitments made during the bidding process. CD&R pledged last summer to retain Morrisons’ head office in Bradford and said it “did not intend to engage in any sale and leaseback transactions of hardware stores “.

That still leaves it room to offload some stores or warehouses and production facilities in a bid to reduce borrowing, as happened at Asda after its 2020 acquisition by EG Group.

Even though its final offer was 61% higher than Morrisons’ share price and nearly a quarter higher than its opening offer, Leahy said CD&R paid “a fair price” for the company.

The pandemic had halted its recovery, he added, while memories of past price wars, allied to worries about the challenges of discounters and e-commerce, meant that “the company’s achievements and prospects were not fully reflected in the share price”.

“Morrisons has always been the company we were interested in. We knew the management, we were very impressed with what they did and we liked the strategy with a clear focus on the market.”

He added that the competitive threat from Aldi and Lidl had diminished. “We’ve probably passed the peak of the disruptive effect of discounters. . . supermarkets have learned to compete with them.

Leahy also praised David Potts, the managing director of Morrisons whom he previously worked with at Tesco, and played down the idea that Potts might leave once the acquisition is complete.

“After speaking with David he is very excited about the future with Morrisons and wants to be a part of it.”

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