Vultures circle Morrisons and markets enter summer lull ahead of Q2 reporting season

Morrisons

“We’ve now got confirmation of three parties interested in Morrisons and fear of missing out could attract further interest from private equity or trade buyers,” says Russ Mould, Investment Director at AJ Bell.

“So why are they all moving now, when Morrisons’ share price pre-bid had been plodding along in roughly the same 170p to 185p range since September 2020?

“There was plenty of time for suitors to make their move when it was clear that Covid vaccines were successful and would help to reopen society. Morrisons’ strategy of being a strategic supplier to Amazon and McColl’s was also well in motion, and it had proved to be a resilient supermarket operator during the pandemic. We knew all this in 2020 and it’s taken until mid-2021 to see bid action.

“Perhaps interested parties only made their move once they could see that UK assets were becoming more attractive to overseas investors. Private equity firms have been sitting on oodles of cash for a long time, known as dry powder in the industry, and they now look intent on going on a spending spree.

“Food retail is not an easy sector in which to make money and competition is only getting tougher. It will be interesting to see if Morrisons’ new owner, assuming a bid is successful, slashes the supermarket’s prices to gain market share. However, if it was that easy, widespread price cuts would have already been pushed through.

“At the end of the day, there is a balance between trying to attract customers and making sure the business still makes a profit. Morrisons doesn’t want its stores resembling a jumble sale with pallets acting as shelves and minimal staff.

“It wants customers to have a good shopping experience and feel as if they are buying decent quality produce – and to do that, it cannot afford to be in the race to the bottom.”

Markets

“Markets paused for breath ahead of the second quarter earnings season which begins towards the end of the month. We’re now in a short period with limited corporate news to drive trading volumes.

“Second quarter numbers may show divergent fortunes. Investor expectations have arguably been too high for many sectors including travel and leisure, and there could be some disappointed shareholders once the next set of figures are out, particularly if the outlook isn’t as rosy as they hoped and that leads to earnings downgrades.

“For now, the new trading week kicks off with a whimper, with the FTSE 100 flat at 7,119. The FTSE 250 only fared slightly better with a 0.2% gain while markets in mainland Europe were generally down. In Asia, Japan’s Nikkei fell 0.6% while China’s SSE rose 0.4%.

“Brent Crude oil nudged ahead 0.3% to $76.41 per barrel. Oil producers’ cartel Opec will today continue talks about increasing output. Failure to strike a deal could push up the price of oil further, adding inflationary pressures to businesses and consumers around the world.”

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