Terry Leahy confident of Morrisons recovery as £6bn debt refinancing looms

More stores, new products, better branding and expanded ecommerce will help generate the additional profit needed to support Wm Morrison’s heavy debts following its takeover by private equity, according to Sir Terry Leahy.

The former Tesco chief executive is a longstanding adviser to Clayton, Dubilier and Rice, the US private equity group that outbid SoftBank affiliate Fortress to acquire the UK’s fourth-biggest supermarket chain last year. He now chairs the company.

“We will be very careful to ensure that the way the business is financed provides plenty of liquidity and flexibility if the environment changes,” Leahy told the Financial Times.

“People can be reassured by CD&R’s approach to business . . . it’s pretty unique in that it has operating executives like myself rather than just financiers. That brings an understanding of the businesses we operate in.”

He said that four-fifths of the firm’s returns had historically come from sales growth and operational improvements, pointing to its record at UK discounter B&M and French furniture retailer BUT. “We don’t think it will be any different with Morrisons,” he said.

In what is likely to be the UK’s largest high-yield debt issue, the company will need to refinance more than £6bn of short-term borrowing taken out to help fund the £10bn acquisition at a time when bond yields are rising.

Some in the credit markets have expressed concern that heavy debt could affect Morrisons’ ability to respond to an expected squeeze on consumers’ spending power and higher food price inflation. Industry data suggest it has lost market share in recent months.

Even if the company can secure terms similar to those offered last year to Asda, a larger rival that also has a large debt burden, Morrisons’ annual interest bill is set to rise sharply.

While Leahy declined to comment on the progress of the refinancing, he said a broad-based increase in profits would help offset higher borrowing costs. “What we have seen is the industry and Morrisons gradually recovering its profitability.”

“It’s lots of little things with retailing but in a relatively large business, those things add up,” he said, citing opportunities to open more stores “in areas where it is not currently represented”, expand online and improve efficiency and product development in its substantial food manufacturing business.

Leahy said he did not think it was necessary for the company to change its strategy in either ecommerce, where it is heavily dependent on partners such as Ocado and Amazon, or convenience. It does not operate its own local shops, but supplies McColl’s and various petrol station operators under wholesale agreements.

He added that Morrisons could expand its forecourt retail operations whether or not CD&R retained ownership of Motor Fuel Group, which it acquired in 2015. MFG operates over 900 filling stations but Leahy did not deny recent reports that the asset may soon be sold.

Terry Leahy wants to open more stores in areas where Morrisons isn’t currently represented © Chris Ratcliffe/Bloomberg

“As is normal, we keep a range of options [for MFG] under review but we’ve learned a lot about forecourt retailing and we feel that in any scenario that knowledge would be beneficial to our investment in Morrisons,” he said.

He declined to comment, however, on the possible sale of some of Morrisons’ assets beyond the commitments made during the bidding process. CD&R pledged last summer to keep Morrisons’ headquarters in Bradford and said it “did not intend to engage in any material store sale and leaseback transactions”.

That still leaves it with leeway to offload some stores or warehouses and production facilities in an effort to reduce borrowings, as has happened at Asda after its acquisition in 2020 by EG Group.

Even though its final offer was 61 per cent above Morrisons’ undisturbed share price and almost a quarter higher than its opening bid, Leahy said CD&R had paid “a fair price” for the company.

The pandemic had interrupted its recovery, he added, while memories of past price wars allied with concerns over the challenges of discounters and ecommerce, meant “the achievements and prospects of the business were not being fully reflected in the share price”.

“Morrisons was always the business we were interested in. We knew the management, we were very impressed with what they’ve done, and we liked the strategy with a clear focus in the market.”

He added that the competitive threat from Aldi and Lidl had abated. “We’re probably past the peak of the disruptive effect of discounters . . . supermarkets have learned how to compete with them.”

Leahy was also fulsome in his praise for David Potts, the Morrisons chief executive with whom he previously worked at Tesco, and played down the idea that Potts might leave once the acquisition had bedded down.

“Having spoken with David, he is very excited about the future with Morrisons and wants to be a part of it.”


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