Morrisons has reportedly seen off competition from the owners of Asda in the battle to gain control of the debt-laden McColl’s Retail Group which on Friday said it was calling in administrators after financing talks failed.
The supermarket, now owned by private equity firm CD&R, is expected to be announced as the preferred bidder for McColl’s despite an improved offer from the EG Group, the forecourt giant controlled by the Issa Brothers.
Sky News stated that the deal, which is expected to see all of McColl’s 1,100 stores and 16,000-strong workforce preserved, will be structured as a pre-pack administration. This means Morrisons will buy McColl’s immediately after it enters insolvency proceedings overseen by PricewaterhouseCoopers (PwC).
As well as commitments to the future of the McColl’s chain of stores, the Morrisons offer includes honouring all outstanding pension obligations and lenders being repaid immediately in full – a principal demand that was among the decisive factors.
McColl’s lenders had rejected an initial offer from Morrisons on Friday that would have seen it take on the firm’s debts but repay them over time. The EG Group then launched a rival bid, prompting Morrisons to table a second offer last night that included the pledge to repay lenders immediately.
Morrisons’ role as a major creditor and supplier to McColl’s is also believed to have played a key role in the final decision.
All parties have yet to comment, but an official announcement is expected to be made by PwC later today.
McColl’s has debts of well over £100m and has been in talks with its lenders and its wholesale supplier [Morrisons] for financing to secure its long term future. In March, McColl’s Chief Executive Jonathan Miller stepped down after the business endured torrid trading conditions and supply chain issues that impacted both its revenue and profit.
As well as the wholesale agreement with Morrrisons, McColl’s has converted 200 of its shops to the Morrisons Daily format, which it had said was “fundamentally reshaping the business into a more profitable and sustainable model”. In November, it announced that it would accelerate the number of conversions to 450 within a year.
McColl’s was valued at about £200m when it floated in 2014, but its market capitalisation was just £3m last week after seeing its share price plummet to around 1p over the last year.
Honor Strachan, food & grocery analyst at GlobalData, commented: “McColl’s move to start selling fresh produce was implemented too late for the retailer to capitalise on consumers’ shift to local shopping during the Covid-19 pandemic. Stores stocked with Morrisons’ fresh produce reportedly performed well, but the rollout was not fast enough to secure footfall, as consumers turned to online shopping or nearby convenience stores that had better ranges and a more pleasant shopping environment. Indeed, much of the McColl’s estate is underinvested and has fallen behind the quality of rivals.
“Pre-pandemic, McColl’s held a stable share of the UK convenience market, estimated at 4% in 2019. However, this dropped to 3.3% last year – falling from seventh to ninth place in just two years. The retailer clearly failed to adapt to the swift changes in shopping habits, despite neighbourhood convenience players performing better than those exposed to urban areas.”
He added: “During a period of intense cost pressure on UK grocers, and an unfavourable outlook for margins and profitability, an acquisition for either of the private equity-owned grocers would be a massive undertaking and a distraction from their core business – especially as raising cash to help absorb these pressures and to invest in retail prices should be the primary focus this year.”
NAM Implications:
- In the circumstances, especially market cap falling from £200m to £3m…
- …the Morrisons deal includes honouring all outstanding pension obligations…
- …and lenders being repaid immediately in full…
- …is probably as good as you get.
- FYI see Pre-pack details
- Status of unsecured creditors may need clarification.
