London’s Takeover Panel stages these events to bring a quick end to unresolved bid situations. Here, the state of play before the auction began was U.S. buyout firm Clayton Dubilier & Rice LLC leading with an offer at 285 pence per share. A U.S.-Canadian buyout consortium led by Fortress Investment Group LLC was trailing at 272 pence (including a 2 pence special dividend). Neither side had declared their pitches “final.”
This starting position meant Fortress had to submit a bid in the first round of Saturday’s five-round competition to stay in contention. It just pipped CD&R, offering 286 pence. In the second round, CD&R countered with a 287 pence a share offer. The surprise is that Fortress then threw in the towel.
Why did Fortress not go to 288 pence just to keep hope alive? That 2 pence-a-share sweetener would have cost only 50 million pounds — a fraction of the all-in cost of the deal, including assumed net debt.
One answer is that Fortress made its first-round bid partly to discover whether its adversary was in combat mode. When CD&R responded with a better offer, however modest, Fortress had grounds to believe there’d be a fight. Up to that point it wasn’t really clear if this was a competitive situation.
All the same, the puzzle remains. So long as the bidding was going up in penny increments before the final knockout round, the marginal cost of staying in the game was small. Both sides had spent a lot of time and fees getting this far. Stock-market investors reckoned a higher bid would have been affordable: Morrison shares closed at 297 pence on Friday.
It may not be a coincidence that both suitors were buyout firms. That makes it more plausible that they had similar financial models and pain thresholds. The pair may also have had overlapping end clients cautioning against bidding higher than where the auction ended. By contrast, a bid between two industrial buyers has different dynamics: Two competing chief executives driven as much by stopping their rival winning as owning the target asset themselves. Think of Comcast Corp.’s decisive bid for U.K. broadcasting peer Sky in a Saturday auction in 2018.
This isn’t the first time a battle between two buyout firms has disappointed. The bidding for private-jet refueling firm Signature Aviation Plc saw Blackstone Inc. ultimately team up with rival bidder Global Infrastructure Partners on a joint offer in January. As here, the market had been betting an auction would lead to a better outcome.
The U.K. has seen a vast amount of buyout activity in 2021, but Morrison should be a reminder that the private-equity industry has generally avoided competing with itself too aggressively.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.
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