Morrisons - comment
The produce business has a value of c£600m to an external buyer, but the level of integration with its supermarkets may make this a strategic asset for Morrisons worth more than it could achieve in the open market. The company may see the proceeds as a method of raising cash to tender for the £750m outstanding SUNs. However, the chaos at ASDA in Q4 last year, due to logistics issues, is a cautionary tale. The press article states that a PE firm has already prepared a fully financed bid. While this suggests that Morrisons is giving serious consideration to the idea, we remain sceptical.
Valuation: If we assume 50% of Revenue is from Fresh food and Produce, and 30% of that comes from Morrisons owned farms => ((£16bn * 50%) * 30% = £2.4bn Revenue. EBITDA margins of 4% equate to an EBITDA of approximately £ 100 m, which translates to a value of around £600m. The change in company-reported leverage would be a fall of 0.4x (to 3.3x).