A Plan For Us Store Inc Takeover Finance Essay
US Stores Inc is a large US grocery retailer. It has steady turnover growth in its local market. In order to find opportunity for future growth, it decides to expand in UK market through acquiring a major UK retailer. After analyzing possible targets (the big 5 in UK market), Morrisons is chosen as the most appropriate target. This is because,
Compared with other targets, Morrisons has suitable size (about 10% of US Stores Inc) for US stores Inc to takeover.
Morrisons has more similar culture and strategy as US Stores Inc. By taking over this company, the bidder could maximize its synergy benefits.
Morrisons has healthy gearing ratio, ...view middle of the document...
Through acquiring companies in UK grocery market, bidders can generate higher margin and market share. Especially, the case of ‘Wal-Mart takeover ASDA’ (Arnold and Fernie, 2000) shed the light of acquiring a major UK retailer for US Stores Inc.
The report will be divided into 5 sections. In section 1, the way to enter UK market will be discussed. In section 2, the target company will be chosen based on its ability to maximize the possible synergies benefits to the bidder. The valuation of Morrison and the maximum price that bidder will pay will be discussed in section 3. In section 4, the payment method will be decided according to bidder’s debt capacity, existing leverage, and existing corporate governance structure and the target company’s shareholders’ preference. Finally, in section 5, the format of the takeover will be analyzed according to target company’s characteristics.
Section 1: the way to enter
Mergers and acquisition may be more appropriate way to enter into the UK grocery market than organic store development. There are 4 main grocery retailers in the market: Tesco, ASDA, Sainsbury’s, and Morrisons. Tesco is market leader which capture more than 30% of the market share. Asda/Wal-Mart and Sainsbury’s capture relatively similar market share (about 17%) (IGD, 2010). Morrisons is the smallest one in the big 4. These 4 retailers dominate in this market (75% market share) and left few expanding opportunities through large scale organic store development. This causes ‘merger and acquisition’ particularly important for other companies who want enter the market/increase market share in the market (Poole et al., 2004).
The market share of the big 4
Section 2: target company
Compared with other similar companies in UK grocery market, Morrisons does not have comparative advantage in its market share, stores coverage, brand loyalty and growth potential. However, there are mainly 3 most attractive places of Morrisons to be chosen as the target company
According to the market value of these retailers, the most appropriate merge targets might be Sainsbury’s Morrisons and M&S. Because all of their size is about 10% of US Store Inc and all of them has modest market share in UK market. On the other hand, it might more risky to takeover Tesco which is about half the size of US Store Inc. By acquiring such a large company, the bidder may encounter some problems, such as cash shortage, and shocks to the bidder’s financial and culture structure. In addition, Asda has already been acquired by Wal-Mart in 1999. Therefore, it seems difficult to acquire this retailer.
US Store Inc.
Culture and Strategy
Morrisons might be more appropriate target than the other 2 after taking the benefit of ‘operating synergies’ into account. Based on the case study of Wal-Mart...