CD&R wins over Morrisons pension trustees with property pledge

Wm Morrison Supermarkets PLC updates

Clayton, Dubilier and Rice has agreed to provide extra support to Wm Morrison’s pension funds if it takes over the UK supermarket group, after trustees warned that a debt-fuelled buyout would “materially weaken” its retirement schemes. 

The New York-based group, one of two US private equity firms vying to buy the grocer with a £9.7bn offer, said it would commit extra Morrisons properties to the pension funds as security, giving them a legal claim over the real estate in the event of an insolvency. It would also retain the schemes’ existing governance structure and share information with the trustees, it said.

The proposal aims to overcome opposition from trustees, who have said a leveraged buyout would risk reducing Morrisons’ ability to contribute to the schemes, and could lead to the pension funds falling down the priority list for repayment if the company became insolvent.

Steve Southern, chair of the trustees, said on Tuesday that he was “pleased” that CD&R had been able to “provide the necessary support and reassurance”, and that talks with the private equity firm were “delivering a positive outcome for all members of Morrisons’ pension schemes”.

The trustees would “[continue] to work with CD&R and Morrisons in the future to ensure scheme benefits remain protected” if the deal went through, they said in a statement.

The buyout group has been embroiled in a months-long bidding war against SoftBank-owned private equity firm Fortress to take over Morrisons, which is more than a century old and has been listed in London for more than 50 years.

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CD&R, which counts former Tesco chief executive Sir Terry Leahy among its advisers, would not say which properties it was committing as security, or how much they were worth. It would not specify what information would be shared with trustees under the new agreement.

The trustees also declined to provide details.

Morrisons’ two pension schemes are both in surplus on an ongoing funding basis. However, the trustees are aiming for the schemes to reach a funding level that would enable an insurer to buy them out, or take over the payment of pension promises, which would eliminate financial reliance on the company.

On this basis, the schemes were last month estimated to have an aggregate deficit of £800m. CD&R’s plan aims to ensure the schemes have the additional security they would need in order for a buyout to be contemplated.

Morrisons’ chair Andrew Higginson said the company’s board was “pleased that the trustees and CD&R have engaged constructively and have now reached an agreement, which safeguards the interests” of scheme members.

However, John Ralfe, an independent pensions expert, said rather than pledging properties, CD&R should be paying in a “big dollop of cash”, to mitigate the higher risk, and the trustees should be demanding this.

“It’s all very well for CD&R to pledge more properties to Morrisons’ two pension schemes, but, in practice, their value is questionable if Morrisons went bust and the trustees had to sell them in the open market,” said Ralfe, a former pensions adviser to the supermarket group.

Morrisons’ board has agreed to recommend CD&R’s 285p a share offer, but Fortress, which bid 270p a share plus a 2p special dividend last month, could still come back with a higher offer. The UK’s Takeover Panel is planning an auction to settle the sale.

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CD&R’s £9.7bn offer values Morrisons’ equity at about £7bn and its net debt at £2.7bn. The company had net debt of £3.2bn at the end of its financial year in January. CD&R envisages financing £10.2bn of the total price tag in debt.



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