What does the forecourt sell-off mean for Morrisons?

Morrisons this week agreed a £2.5bn deal to sell its 337 petrol forecourts to fellow CD&R company Motor Fuel Group (MFG) after weeks of speculation.

But as Morrisons fights to “reinvigorate” its performance and win back share, what does the deal mean for the supermarket, its customers, and the newly created forecourt titan?

Anyone thinking new Morrisons boss Rami Baitiéh would walk away with a massive war chest to sink straight into price cuts was soon reminded how supermarkets, and private equity, work.

Morrisons chairman Terry Leahy spoke about the deal freeing up Morrisons to “do what it does best” – but it was clear he didn’t mean a blank cheque for Baitiéh.

CFO Joanna Goff subsequently told this week’s results call the “vast majority” of the money generated by the deal would go towards lowering its eye-watering debt. Her comments came as Morrisons recorded its sixth straight quarter of growth, albeit with a less than stellar 1.8% LFL sales rise.

Debt

Morrisons is clearly keen to address the ramifications of its 2021 £7bn takeover by CD&R. The deal was largely financed through debt, which went on its own balance sheet.

Latest published figures show Morrisons made a £1.5bn loss amid a net debt pile of £8bn, which included £6.1bn of borrowing, for the year to 30 October 2022.

The MFG deal should significantly reduce its hefty interest payments. Thanks to soaring interest rates since CD&R’s takeover, they now cost £400m a year, according to estimates from ratings agency Moody’s.

The agency therefore sees the benefit in offloading the fuel business, even if it means losing £219m in underlying EBITDA. “While [it] will result in a reduction in Morrisons’ overall underlying EBITDA, the company is likely to see benefits to working capital as well as a reduction in its interest paid as it plans to use a meaningful amount of the proceeds towards repayment of debt,” says Gunjan Dixit, senior credit officer at Moody’s.

The debt reduction enables Morrisons to “invest in the grocery and food making businesses”, she adds.

“We expect Morrisons’ revenue and earnings to be more resilient once the fuel business has been disposed,” Dixit says.

Customers

That should provide a stronger base for Baitiéh to build on.

But rather than trying to compete with the likes of Tesco and the discounters by throwing money at price cuts, the new boss sees need for more fundamental change.

“We are developing plans to reinvigorate, refresh and strengthen Morrisons and to start a new chapter,” he says. Baitiéh is clear this is about Morrisons returning to its strengths: capitalising on its vertical supply chain and its Market Street fresh food offering, and winning back its reputation for store standards.

Rumours of a possible divestment of Morrisons’ prized manufacturing arm have persisted alongside the expectation of a forecourts deal. But Baitiéh seems to have ruled out selling the group’s jewel in the crown.

Far from offloading the 18 manufacturing sites, the new boss sings the praises of its “unique” offering. “I really believe our Market Street, our manufacturing, our production centres, our relationship with 3,000 British farmers… are strengths and competitive advantages to Morrisons,” the new boss says.

It is part of a strategy that has customers at its centre. There will be no major strategy meetings without customers represented, says Baitiéh. He has promised a series of meetings nationally and locally, as well as plans to amplify the voice of store managers.

Baitiéh gives an example of this approach in action. Upon receiving feedback from a customer that a particular item was priced too high, Morrisons immediately worked with the supplier to change the price within an hour, he says.

He also points to the turnaround in the Morrisons convenience business, which has gone from the administration of McColl’s in May 2022 to a profit with 18 months. “The improvement since acquiring McColl’s from administration shows our ability to change and improve quickly, to listen to customers and to increase sales at an impressive rate. It’s been a real turnaround and that takes great leadership, outstanding execution and a supply chain that is fast and flexible.”

Fuel

In the case of MFG, the deal will have clear ramifications for its fuel business. It has taken out a significant rival in Morrisons.

That could result in a less competitive market. Even among the supermarkets, which have historically lowered margins on fuel to boost footfall, the latest CMA probe found competition had weakened.

But MPK Garages retail director Wayne Harrand maintains the deal will result in more consistent fuel pricing.

“It will help to stop some of the drastic fluctuations,” Harrand explains. “It will be more consistent and more reflective of what everyone is else is pricing because MFG are more aware of the market conditions than Morrisons.”

A further benefit for MFG is that it has overtaken Tesco as the UK’s biggest retailer in terms of fuel volume. That should give it access to better commercial arrangements.

There is also an opportunity to improve the shop offer, says one industry source – particularly the retail environment, food to go and valeting.

“When you look at the structure of a supermarket forecourt, it’s very different to a conventional forecourt – it’s mainly just crisps and chocolate,” the source says. “But MFG can take some key learnings from their forecourt business and apply that to the supermarket estate.”

Concessions such as Greggs, Burger King and Starbucks could be introduced, as well as more EV charging facilities as part of MFG’s £400m rollout programme, making them overall “destination stores”.

The forecasts are backed by MFG CEO William Bannister, who plans to “accelerate the rollout of ultra-rapid EV charging infrastructure across the UK while also giving customers a first-class retail offer”.

Echoes of Asda EG

MFG’s focus on building up its EV charging infrastructure suggests that, like Asda owners the Issa brothers, it recognises fuel will increasingly make up a smaller and smaller proportion of revenues at forecourts.

The Issas have put a focus on convenience offerings, food to go, Amazon lockers and valeting facilities while customers recharge vehicles – turning sites into destinations to drive increased traffic.

The Morrisons and MFG deal also brings to mind the Issas from a financial point of view. Asda acquired EG Group’s UK & Ireland operations last year, as the Issas and TDR Capital sought to reduce a debt mountain by shifting forecourt assets to a connected party.

However, the Issas shifted their UK petrol stations on to Asda’s books rather than off them, given the greater need to address the $9bn of debt weighing on the EG empire before  borrowings were due in 2025.

While Asda’s leverage was unchanged by the transaction, it increased its interest payment burden thanks to the £770m loan from buyout group Apollo to fund the deal – in contrast to the lower interest rate burden from which Morrisons now stands to benefit.