The proposed debt-fuelled buyouts of Morrisons would “materially weaken” its ability to support the retirements of 85,000 current and former workers, the private equity firms vying for the grocer have been warned by pension trustees.
In an unusual public intervention in ongoing takeover talks, the trustees of pension assets worth £5.5bn said the proposed buyout would undermine the covenant protecting the retirement pots of its members.
They demanded that both bidders offer improved financial security to scheme members before any deal can go ahead.
Although pension trustees do not have formal powers to block takeovers, their political clout in the wake of scandals such as BHS would threaten to make them influential opponents.
Steve Southern, the chairman of trustees, said: “An offer for Morrisons structured along the lines of the current offers would, if successful, materially weaken the existing sponsor covenant supporting the pension schemes, unless appropriate additional support for the schemes is provided. We hope agreement can be reached as soon as possible on an additional security package that provides protection for members’ benefits.”
Morrisons is at the centre of a bidding war between US private equity firms Clayton, Dubilier & Rice (CD&R) and Fortress.
Last week the Morrisons board switched sides and recommended investors back the CD&R bid, which is being spearheaded by former Tesco boss Sir Terry Leahy. The directors had previously favoured a £6.7bn offer from Fortress.
Both suitors are expected to borrow heavily against Morrisons to fund an acquisition. The trustees fear that this could mean less cash to go into pension pots.
The pension schemes are in surplus on an accounting basis. However, the trustees said that they were £800m short of the assets needed to secure members benefits with an insurance company, a figure known as the “buy out”, or Section 75 deficit.
If Morrisons’ balance sheet were weakened by debts imposed in a private equity buyout, the trusteed could demand that more of the supermarket’s valuable property portfolio be pledged to pensioners in the event of insolvency. However, the potential to sell property is said to be one of the main attractions to both bidders.
CD&R, which had its first meeting with the trustees last week, said on Tuesday that it looked forward to “further positive engagement” and added it would provide “appropriate support” to pensioners.
However, it referred to non-binding offer documents published last week that said it did not “intend to make any changes” to the pension schemes and added that its intention was “for employer contributions to the UK Pension Schemes to continue in line with current arrangements”.
Fortress had ongoing discussions with the trustees to allay their concerns before CD&R upped its bid, the pension custodians revealed.
John Ralfe, an independent pensions consultant, said: “The trustees are doing the right thing in asking for security to protect the position of its members. The two defined benefit schemes are in good shape, so the ‘buy out’ deficit is only £800m - not large in the context of the offers and CD&R [or Fortress] should get their cheque book out and pay some or all of this.”
Trustees plan to sell the Morrisons schemes to an insurer in the coming years, which would mirror a similar move by Walmart. The US retailer offloaded one of Asda’s pension schemes in a £3.8bn deal in 2019 ahead of the sale of the supermarket chain to the billionaire Issa brothers and TDR Capital.
Large corporate firms have increasingly been looking to insure pension liabilities.
A spokesman for Oppidum Bidco, Fortress’s investment vehicle, said: “We’ve been in a constructive dialogue with the pension trustees in order to find a mutually acceptable solution. As stated in our intention statements, the benefits provided by the Morrisons Pension Schemes are not affected by the acquisition.”
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