LONDON, June 21 (Reuters Breakingviews) - Clayton, Dubilier & Rice can afford to dig deep for its UK grocery spree. Wm Morrison Supermarkets (MRW.L) has rejected the buyout group’s 5.5 billion pound bid for Britain’s fourth-largest supermarket chain. Given that a financial buyer should be able to make a decent return without much extra heavy lifting, it can justify a bigger trolley. British grocers have become a hot commodity amid the pandemic. The Issa brothers last year bought Asda from Walmart (WMT.N) for 6.8 billion pounds. Czech tycoon Daniel Kretinsky recently snapped up 10% of J Sainsbury (SBRY.L). Now CD&R is seeking to join the action with a 230-pence-per-share bid for Morrisons. Although the all-cash offer represents a near-30% premium and the grocer’s shares haven’t reached that level in over two years, the Bradford-based group’s board reckons it “significantly undervalued” the company. Morrisons has a point. CD&R’s offer values it at 10.5 billion pounds, once 3 billion pounds of net debt and leases worth 1.8 billion pounds are added to the purchase price. That’s around 12 times the supermarket group’s EBITDA of nearly 850 million pounds for the year to January. There’s also limited scope for CD&R to crank debt up much further. But analysts already expect Morrisons to boost sales by 3% a year over the next three years and lift its EBITDA margin above 6%. That implies the company could generate 1.25 billion pounds of EBITDA by January 2026. At the same 12 times multiple, Morrisons’ enterprise value would then be 15.5 billion pounds. Now assume CD&R diverts 30% of the company’s operating cash flow to pay down debt over five years of ownership. Its equity investment would more than double to 12.7 billion pounds. In other words, CD&R could earn a respectable 17% internal rate of return on its investment without making many changes to Morrisons’ business, according to Breakingviews calculations. The buyout firm’s plans are unclear. But if it could boost Morrisons’ EBITDA margins to 7.5% - the same as UK market leader Tesco (TSCO.L) is expected to earn in 2024 – it could afford to pay more than 300 pence per share and still book a 20% return. Another option is to pay off debt by selling real estate: Morrisons owns 85% of its properties. Buyout shoppers can afford to spend more on Morrisons. Follow @aimeedonnellan on Twitter CONTEXT NEWS - British supermarket group Wm Morrison Supermarkets said on June 19 it had rejected a 5.5 billion pound cash offer from U.S. private equity firm Clayton, Dubilier & Rice (CD&R), saying it is far too low. - Britain"s fourth-largest grocer by sales said it received the "unsolicited, highly conditional non-binding" proposed offer worth 230 pence a share on June 14 and rejected it on June 17. - Morrisons shares closed at 178 pence on June 18. - Morrisons said CD&R"s proposal included the company’s final ordinary dividend of 5.11 pence per share. - Under British takeover rules CD&R has until July 17 to announce a firm intention to make an offer. - Shares in Morrisons were up 32% at 235 pence by 0800 GMT on June 21. Shares in rival supermarkets Tesco and J Sainsbury were up 2.4% and 4.2%, respectively.