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At a bargain price: are investors taking advantage of the plight of private companies? - Walla! Of money

2023-02-12T07:22:17.451Z


Even private companies that are not traded on the stock exchange and have become addicted to the cheap money, find themselves in a serious cash problem. What can be learned from the case of the "Morrison's" supermarket chain?


When money was cheap, companies were purchased above their real value.

Now the debt has to be paid back, but the money has become expensive (Photo: ShutterStock)

Here is a story that illustrates the problem in that the era of cheap money is over and the era of distress is beginning, not only in the capital market, but also - if you want - in a much more tangible world...



After many companies have lost huge amounts of capital on stock exchanges around the world, some investors are moving to the private companies' court and looking for avenues Investing among those who are suffocating under the ever-increasing financing costs.



Those companies are in the investors' portfolio under the definition 'non-marketable assets', which means that they are not traded on the stock exchange, and therefore avoid market volatility.



However, the increase in interest rates played a role in the cards, and led to the danger of reducing the value even to what were considered until recently as islands of security in the investment portfolios - the private companies.



For example, among the thousands of transactions made in the era of cheap money was the one in which the veteran American investment fund Clayton, Dubilier & Rice took over the British supermarket chain Morrisons at the end of 2021 at a value of 9.5 billion dollars - a premium of about 60% on its price when the auction for its sale was published .

In an attempt to raise cash, the chain raised prices, which made it less attractive to customers. The deadly combination between expensive money and inflation (Photo: ShutterStock)

Morrisons, based in Bradford in northern England, is one of the largest grocery chains in Great Britain, which dropped from fourth place among all its competitors in the Kingdom after being investigated by the British regulator on suspicion of harming competition, among other things as a result of its purchase by CD&R.



Only a few months after it was purchased, the money began to become more expensive as a result of the interest rate increases - and with it the debts also became more expensive.



At the end of the third quarter of the past year, the chain reported about a 50% drop in its profits for that quarter compared to the corresponding quarter a year earlier, as a result of "unprecedented inflationary pressures", as it defined it.


At the beginning of last January, the chain even announced that it was the biggest loser among British supermarkets during Christmas, when most shoppers flocked to the rivals.



But the chain is not the only loser, as those who invested in it, who took on a debt of about 6 billion pounds to finance the takeover, are drowning alongside it.



Just last December, the Fitch rating agency downgraded Morrisons' debt rating, expressing concern about the level of leverage it had reached.



The American rating agency is afraid of the company's ability to service its debt, which increases as interest rates rise, forcing it to raise prices faster than its competitors - thus causing it to lose market share.



In an unusual move, CD&R approached hundreds of the chain's employees at the level of store managers and above and asked them to invest between 2,000 and 25,000 pounds in the company, depending on the employee's managerial level



. Many will join it when they are desperate for financial oxygen.



The investors, for their part, are indeed waiting with oxygen cylinders, but will only distribute them to companies they recognize as the best opportunity for them. The rest may drown.

  • Of money

  • consumption

  • financial decisions

Tags

  • supermarket

  • debts

  • Stock Exchange

  • Investors

Source: walla

All business articles on 2023-02-12

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