Spotlight on...City sees rationale in M&S takeover talk
Marks & Spencer remains silent on a possible takeover approach
Marks & Spencer might have indicated there is nothing to announce, but reports of private equity interest in the UK's largest clothing retailer have got the industry talking.
According to a Bloomberg report on Friday (24 August), private equity firm CVC Capital Partners has been exploring the possibility of taking M&S private, having approached executives about a possible management role under its control.
The report sent M&S's shares soaring, although the retailer was keen to play down the rumours.
"If we had something to say we would say it," chairman Robert Swannell said yesterday. "It is August."
CVC has yet to make a public statement on the report, which some could file under 'speculation'. Analysts agree there may not yet be formal interest in M&S but they suggest it is not unlikely a private equity firm could make a bid for the retailer.
Conlumino analyst Simon Chinn says there is "no hard evidence" of an approach by CVC but argues M&S's share price means "it is going to be a target...and be interesting to certain parties".
"If you look at the fundamentals of Marks & Spencer, despite the lacklustre performance of recent quarters, it's still a very strong brand," he explains.
This view is one shared by Singer Capital Markets analyst Matthew McEachran. "M&S has got a lot of untapped potential which they are currently struggling to unlock, but could potentially be unlocked," he says.
However, he adds: "It's been a takeover target before...but whether the metrics actually work is another question. Ultimately, if there were a bid for M&S, you can guarantee you'd be looking at the valuation today in terms of a takeover, so that means putting in place the funding, what's the debt to equity split, etc etc.
"It would be complicated but I can understand why someone would be looking at it. Whether that makes a bid likely or unlikely, I can't comment, but I can understand the rationale. It's sitting on a cheap multiple, it's a blue-chip name and there is potential to tap into further down the line."
In its full-year results in May, M&S reported its first drop in profits in three years, resulting in the retailer cutting its sales forecast and lowering the amount it will spend on capex.
General merchandise gloom
It has done much over the past decade to try to steady its business. But in the 13 years since it became the first UK retailer to hit the GBP1bn profit mark, only once, in 2008, has it managed to break through this magic barrier for a second time.
Despite its efforts, parts of the company continue to suffer, with most problems stemming from its general merchandise division, which recorded its worst performance in three years according to its first-quarter results last month.
Like-for-like general merchandise sales (90% of which is clothing, the rest footwear and home products) tumbled 6.8% in the three months to 30 June. Women's wear, for which no individual figures are available, is believed to have done even worse than this.
The food division, however, has fared better, with sales up 3.9% on the back of a 2.1% increase in like-for-like sales.
Despite the mixed recent performance, McEachran sees M&S as an "attractive" business and one that is "under-potentialised".
"Could someone do a better job of it?" he asks. "Well possibly, but they've been trying a few tricks themselves that don't seem to have delivered on the upside.
"There is still a lot of legacy in infrastructure systems and IT projects which are yet to complete so there is still quite a lot of capital commitment to the business. It's not a slam dunk by any stretch, but I can understand why someone would look at it, vis a vis the metrics."
McEachran, however, believes shareholders would be unlikely to let the group go at "a cheap price", a view shared by Shore Capital analyst Clive Black.
"Whilst we do not know if anything will emerge, if it did then M&S should command a material premium to the present share price to our minds," Black notes. "M&S is a highly-prized and leading brand in UK retailing with a strong international resonance and potential.
"The group has a strong balance sheet with commendable fixed assets and manageable solvency ratios that should materially improve once the investment is complete; those future cash flows should not be overlooked by shareholders."
Above all, the speculation is only likely to increase the pressure on M&S chief executive Marc Bolland to turn around the fortunes of the retailer two years into his tenure.
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