Wednesday 29 August 2012

Marks & Spencer - an inevitable takeover?

Yesterday’s news of a possible bid for M&S obviously had an impact on the share price. However, the key issues for NAMs have to be
- the likelihood of takeover
- by whom
- impact on the business

Likelihood of takeover:
Apart from the usual indicators (ROCE, Net Margin and Stockturn where M&S is more or less in line with the big four) a key measure has to be the Market Capitalisation/sales relationship i.e. cost to buy the company vs. its sales.
MktCap/Sales (latest figs, the higher the better, in terms of value of the company)
- Walmart         58.5%
- Tesco             42.1%
- JS                  27.3%
- Morrisons       38.5%
- M&S              60.3%

At £6bn MktCap it can be seen that M&S would be relatively more expensive to buy than Walmart, in terms of sales generation.

Possible players:
Essentially three options: another retailer, a Private Equity Fund or a Sovereign Wealth Fund
  • A retailer: unlikely (competition rules, difficulty in improving fundamental ratios) insufficient synergies
  • Private Equity Fund, unlikely given the need for 5year exit via re-flotation, difficulty in sell-off of real estate assets in this timeframe/climate to liquidate debt, no obvious improvements in key ratios possible vs. the competition
  • A Sovereign Wealth Fund (a Government Agency like Mid-East or China), likely as a long term investment, a much slower burn vs. prevailing money-rates in the market, via existing management until they are found wanting…
Impact on the business:
A more stable supplier-retailer environment, with an emphasis on steady financial performance, long term, with access to money for investment in ideas/acquisition/global expansion in the business.

Base requirement for NAMs to calculate cost and value of supplier package to the new M&S, a good basis also for their dealings with competing retailers…

M&S docs:
5 year record 

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