PitchBook News - A PE tempest in a teapot?

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The Weekend Pitch

June 27, 2021

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For private equity, big buyouts rarely make for great PR, especially when the investor is coming from overseas. Nowhere is this more apparent now than in the British brouhaha surrounding New York-based Clayton, Dubilier & Rice's attempt to buy Morrisons, the UK's fourth-biggest supermarket chain by market share.

Yet is the alarm over CD&R's Morrison deal a storm in a teacup? I'm Andrew Woodman, and welcome back to The Weekend Pitch. You can reach me here.

(Christopher Furlong/Getty Images)

CD&R has offered £5.5 billion (about $7.7 billion) for Morrisons, but the chain spurned the proposal as undervaluing the company. CD&R, which has until July 17 to revise its offer, hasn't walked away yet. Fearing that more potential bidders are poised to swoop in on Morrisons, Britain's opposition Labour Party is calling on the government to intervene—even before a deal is on the table.

Seema Malhotra, a Labour member of Parliament, says PE ownership poses a threat to supermarkets, citing worries about loading businesses with debt, stripping them of their assets, and leaving employers and taxpayers to pick up the tab. That's a crude generalization, but Malhotra isn't alone. A surge in PE acquisitions of UK companies since the start of the year has invited increasing scrutiny and criticism of the asset class from politicians and the media alike.

It also doesn't help that only last December, the UK also saw the collapse of Debenhams, an iconic department store that was once controlled by CVC Capital Partners, TPG and Merrill Lynch Global Private Equity. Critics say Debenhams never recovered from the debt it incurred under PE ownership.

The suspicion of private equity appears bipartisan, too. The Daily Mail, a tabloid widely seen as a cheerleader for center-right politics, has also seized upon the uptick in PE activity and, specifically, the controversy surrounding private ownership of care homes, churning out headlines in recent weeks referring to "pandemic plunderers" and "vulture capitalists."

While the headlines may be formed from a kernel of truth, they lack nuance. They ignore PE firms' long history of buying and selling big British companies. And while that record isn't impeccable, not all deals have ended in closures and mass layoffs. Furthermore, deals resembling Morrisons haven't caused nearly as much controversy. Take Asda, the formerly Walmart-owned supermarket chain that was snapped up by London-based TDR Capital last year. (That deal was quietly completed in February.)

Consolidation of supermarket groups has been happening independently of PE involvement for years—and long before the pandemic. Before selling Asda to TDR, Walmart had tried to offload the chain to rival Sainsbury's, only to see that plan blocked by antitrust regulators. Morrisons itself even gobbled up rival UK supermarket Safeway (a UK spinoff of its American namesake) for £3.3 billion in 2004.

Surely there are legitimate concerns to be raised about PE practices. But fears around CD&R's attempt to acquire Morrisons seem off the mark, especially when one considers CD&R's track record. This isn't CD&R's first foray into UK retail. It previously acquired British variety store chain B&M in 2013 and took it public in 2014 before exiting the business in 2018. By many metrics, the investment was a success—during CD&R's ownership, B&M opened 300 stores, increased its headcount to 13,000 and saw sales pass £1 billion. So it's reasonable to assume that, should CD&R acquire Morrisons, its prognosis wouldn't be quite as bleak as Malhotra implies.

What has received far less attention are reports that another Morrisons' suitor is tech giant Amazon.com—a company that has already created a near-monopoly in ecommerce and, for my money, would be a far more controversial buyer than any private equity firm could hope to be.

With all these things considered, the Morrisons deal seems to be an odd choice as a poster child for PE's worst excesses. This isn't to suggest that PE firms deserve a free pass. But if you're going to raise a national fuss about the wrongs committed by investors, save your powder for higher-stakes battles that are genuinely in the public interest. Fears of PE encroachment into ESG-sensitive areas such as elder care and fostering services feel justified. And yet those cases haven't garnered nearly as much attention as retail deals have. The outcry over PE taking over Britain's high-profile retail brands seems arbitrary at best—and, at worst, disingenuous.

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Quote/Unquote

"It's an undeserved and unearned fallacy."

—Andrew Smith, managing director of the Savory Fund at Mercato Partners, on the belief that investors can't make money in restaurants.

Deal flow

It's a delicious time to be in the food industry, and dealmakers in PE, VC and investment banking have all found something to chew on.

Private equity partners are circling the middle-market restaurant industry, and Utah-based Mercato Partners has raised a dedicated $100 million fund for the opportunity. The pandemic hammered deals in the space, but a rebound is expected as the US reopens.

VC investment in foodtech is on track for a record year, led by megadeals for online grocery services and food-delivery apps. Looking ahead, the masses of consumer data these platforms amass could give rise to new opportunities for AI.

Sweetgreen, a fast-casual provider of healthy lunches, filed confidentially for an IPO, Axios reported. Not-so-healthy doughnut chain Krispy Kreme is targeting a valuation of up to $4 billion in its IPO next week, according to reports. This is the North Carolina company’s second crack at public markets, following a take-private deal with JAB Holding and BDT Capital Partners in 2016.

Datapoints

After years of speculation about a possible sale, digital media behemoth BuzzFeed agreed to go public through an acquisition via blank-check company 890 5th Avenue Partners. As part of the deal, Buzzfeed will acquire Complex Networks, a Gen-Z focused digital media publisher, from Verizon Communications and Hearst for $300 million. Altogether, the combined entity will be valued at around $1.5 billion. Upon closing, Buzzfeed will join the Nasdaq and continue to operate under the company’s current name

Though SPAC listings have cooled in recent months, they may provide an exit route for investors in digital media companies that have posted mixed financial results over the past few years. The Athletic, Axios and Forbes have all reportedly explored going public via SPAC. So far, two media companies have gone public via SPACs in 2021, according to PitchBook data.

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(Alexander_Volkov/Getty Images)

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This edition of The Weekend Pitch was written by Andrew Woodman, Adam Lewis and James Thorne. It was edited by Alexander Davis, Kate Rainey and Liana Scarsella.

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