Morrisons has rejected a £5.5bn takeover proposal from US private equity firm Clayton, Dubilier & Rice.
The UK’s fourth-largest supermarket, with 118,000 staff, said the offer “significantly undervalues” the firm.
CD&R, where former Tesco boss Sir Terry Leahy is an advisor, confirmed it was considering a formal bid after weekend media speculation about its plans.
The US firm has previously made investments in the discount shop chain B&M, from which it made more than £1bn.
Morrisons said in a statement it had “evaluated the conditional proposal together with its financial adviser, Rothschild & Co, and unanimously concluded that the conditional proposal significantly undervalued Morrisons and its future prospects”.
CD&R’s proposal, worth 230 pence a share, does not constitute a formal offer, and under UK takeover rules it has until 17 July to announce a firm intention to bid or walk away.
The move by CD&R, one of the biggest takeover firms in the world, would have been one of the most high profile of many bids for UK companies in the past year.
BBC business correspondent Katie Prescott said the flurry of takeover activity was being fuelled by relatively low share prices of businesses in the UK compared to abroad and cheap money because of low interest rates.
CD&R has this year agreed a £2.8bn takeover of UK healthcare group UDG, and a £308m bid for the plumbing group Wolseley.
In February, Zuber and Mohsin Issa and private equity firm TDR Capital purchased a majority stake in Asda from Walmart in a deal valuing the UK supermarket group at £6.8bn.
That deal followed Sainsbury’s failure to take over Asda, which was blocked by the competition regulator.
Morrisons – with its 500-store property portfolio, most of which it owns outright – and its 10% of the grocery market – is an attractive proposition.
There has been speculation about bids for Morrisons in the past from Amazon, which sells the supermarket’s products on its site.
According to the Financial Times, which along with Sky News, first revealed details of CD&R’s intentions, the US buy-out firm approached Morrisons on 14 June. In addition to the cash offer, CD&R would take on Morrisons’ £3.2bn of debt, taking the total value of any deal to almost £9bn.
A formal bid from CD&R could involve Mr Leahy, who when at Tesco was the boss of Andrew Higginson and David Potts, now Morrisons’ chairman and chief executive respectively.
Last month, Morrisons said sales had increased by 2.7% in the 14 weeks to 9 May. But in the previous three months alone it had faced a £27m bill for Covid-related costs.
Earlier this month, Morrisons was rebuked by investors over executive pay, with more than 70% of votes cast at its annual shareholders’ meeting rejecting its pay report.