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The buyout of British grocer Morrisons was supposed to be a dream ticket for some of the biggest banks in the world. Instead, Goldman Sachs and others ended up losing hundreds of millions of pounds. This is the story of how the UK's largest leveraged buyout in a decade turned into a nightmare on Wall Street.
Back in 2021 markets were booming. Private equity firms, aided by low interest rates and flushed with record amounts of cash from their investors, were targeting bigger and bigger publicly listed companies to buy or take private. Wm Morrison, a beloved British grocer that had been listed since the 1960s, became a target due to its unencumbered property portfolio.
US firms Clayton, Dubilier & Rice and Fortress soon found themselves in a shootout for Morrisons. While CD&R prevailed with a £10bn bid, this left its banks, led by Goldman Sachs, on the hook for £6.6bn. On top of this, Goldman contributed £1.3bn of preference shares, risky debt-like instruments.
When it comes to leveraged buyouts, banks like Goldman have a motto: "We're in the moving business, not the storage business." This is because they don't want to hold the loans long term, but pass them on to funds that specialise in investing in risky debt. This is where the danger comes in.
Imagine a company supplying milk to supermarkets, which buys it at a set price from farmers, but then sells it at a fluctuating market price to grocers. If the price of milk fell sharply, the supplier would take big losses. It's the same for debt in a leveraged buyout. The banks promise the borrower a maximum interest rate. If investors demand a higher rate, the banks fund the difference and take a loss.
When Morrisons was underwritten credit markets were hot and the banks were more complacent about their risk. By the time they came to pass the parcel markets were falling apart and investors were unwilling to buy. While Goldman and Co managed to sell some chunks of the debt bit by bit, over the course of 2022, they'd taken a hit worth hundreds of millions of pounds in the process.