The WM Morrison Supermarkets share price has opened the week to gains of over 31% after throwing out a £5.5 billion bid from American private equity giants Clayton Dubilier & Rice (CD&R). The supermarket chain, the UK’s fourth-largest, called the bid “unsolicited” as well as saying it “significantly” undervalued the business.

However, despite the Morrisons board giving CD&R’s opening bid short shrift, a bidding war is now expected for the FTSE 250 company. Morrisons recently slipped out of the benchmark London FTSE 100 index for the first time in 5 years, despite the sales boom the groceries sector has experienced over the Covid-19 pandemic.

No longer benefiting from demand for its shares from benchmark index trackers may well have encouraged the private equity bid. Multiple major British companies have been either acquired or the subject of takeover bids by private equity and public companies listed elsewhere. A combination of first Brexit and then a slower recovery from the coronavirus sell-off last spring means UK valuations are currently considered attractive and deep-pocketed vultures are circling.

CD&R announced its intention to make a 230p-a-share cash bid for Morrisons, which it was obliged to do by stock market rules. Making the announcement means the private equity firm, one of the world’s oldest, has until July 17^th to make a firm offer or pull out of the bid. CD&R will have to increase its offer to have any chance of it being accepted after a firm rejection of the initial terms proposed. Morrisons responded over the weekend by stating:

“The conditional proposal was subject to the satisfaction or waiver by CD&R of a number of pre- conditions including the completion of detailed due diligence and the arrangement of debt financing.”

The board told CD&R it was rejecting the bid on Thursday but is now braced for new offers and a potential bidding war. After a period of struggle following the 2008 retirement of Sir Ken Morrison, who built the Bradford-based supermarket chain from a collection of market stalls, its fortunes have been revived by current chief executive David Potts. Over the six years he has been at the helm, Potts has cut prices, shut convenience stores, entered into a wholesale agreement with convenience store operator McColls and partnered with Amazon to grow online sales.

However, the company experienced a shareholder revolt earlier this month, with 70% of votes going against its pay report. The board had wanted to award Mr Potts his maximum £1.7 million bonus despite a drop in profits.

The calculation that justified the reward was based on results stripping out £290 million of pandemic-related costs as one-off expenses beyond the control of management. But the boost to sales resulting from the pandemic was not treated as equally beyond the influence of top management and adjusted for, which investors considered unfair.