“IT’s a dodgy idea, we don’t have enough choice on the high street as it is,”
said Claire Taylor, an office worker who popped into Marks & Spencer on
Thursday to buy a lunchtime sandwich. “Oh no. I like M&S,
Sainsbury is a bit rubbish really ...” said another young shopper at the
Moorgate branch of M&S in the City of London.
Of course they were talking about the hottest gossip in the Square Mile — the
tantalising prospect of M&S mounting a blockbuster £11 billion bid for
supermarket giant J Sainsbury.
The prospect of one of the biggest mergers in City history, bringing together
two of the most iconic brands on the British high street, could not fail to
get people talking. The M&S management, led by Stuart Rose, is studying
the possibility internally after a private-equity consortium comprising KKR,
CVC, Blackstone and Texas Pacific Group revealed it was assessing its own
bid for Sainsbury.
Combining M&S with Sainsbury has been the stuff of fantasy for investment
bankers for years, but speculation is intensifying that this time it may
come true.
Marks & Sainsbury’s: even the name trips easily off the tongue. It would
become the second-biggest retailer behind Tesco in the UK with a joint
turnover of £25 billion. Sainsbury could stock M&S branded food,
making it available to many more people. M&S clothing could also be sold
through Sainsbury stores, providing a powerful boost to the supermarket’s
nonfood business.
On paper the combination could also provide a neat answer to the thorny issue
of who will succeed Rose at M&S. Who better than the ambitious Justin
King, a former head of the M&S food division, who has already schmoozed
the City with his turn-round programme at Sainsbury?
There is even some compelling financial logic to such a transaction. Rod
Whitehead and James Collins at Deutsche Bank estimate that combining the two
companies would create £331m of synergies by 2010, with the bulk of the
savings coming from buying gains (£130m) and reducing overhead costs (£120m).
Together the two companies would have £11.5 billion of freehold property. Even
if M&S chose to help pay for the acquisition by selling and then leasing
back £5 billion of that property, it would still be left with £6.5 billion
of assets.
A merger could also make it easier for M&S to expand. Deutsche estimates
that M&S needs an extra 40% of space in food and nonfood. M&S has
13.6m sq ft of shop space to Sainsbury’s 17m and it is possible that some of
the biggest Sainsbury stores would deliver better profitability as M&S
sites. Some of the 300 smaller Sainsbury’s local stores could also perform
better as M&S Simply Food stores.
With a powerful consortium mulling an £11 billion bid for Sainsbury, the
prospect of riding in as a white knight may be too tempting for Rose to
resist. He is studying the idea and even if his banking advisers at
Citigroup have not been officially engaged, they are no doubt doing their
sums on the numbers.
It would be difficult to imagine a more spectacular hurrah for Rose than
seizing Sainsbury, but equally it would be difficult to imagine a bigger
gamble.
Tony Shiret, retail analyst at Credit Suisse First Boston, is a sceptic. He
argues that while a deal may look good on paper, there is no chance the bid
will happen.
“It would be a Pandora’s box for M&S, I can only see risk,”
said Shiret.
And one retail-industry executive offered this advice last week: “If Stuart
Rose is thinking of bidding for Sainsbury he should go away and lie down in
a darkened room and the feeling will hopefully go away.”
Richard Hyman, retail analyst at Verdict, was also cautious. “I’ve heard a
great many sillier ideas than M&S buying Sainsbury over the last 25
years, because potentially it addresses a lot of key issues for both
businesses,” he said.
“But while I don’t think it is fanciful to talk about, it would be a high-risk
move. Rose’s judgment is his best asset and he doesn’t need to do this. The
danger is that a deal is made on the rebound, which would take both
companies’ eyes off the recovery ball.”
The prospect of the merger also appeared to get a mixed reaction from
shoppers. In a snapshot of opinion gauged at the Moorgate branch of M&S
last week, customers appeared to be underwhelmed.
“I see them both as filling their own niches. I can’t see the logic in
bringing them together,” said Ian Lindt.
Hazel Ewing, another M&S shopper and M&S shareholder, was a rare
enthusiast on the subject. “I think it could be a very good thing to do. The
company did not do very well under the previous regime, when it expanded in
Europe and America. Stuart Rose has got the UK market sewn up, so why not
concentrate his expansion efforts there?” she said.
So possibly good on paper, but would it work in reality?
First off, could Rose and King really work together?
One City source who knows both men well maintains there is no chance King
would play second fiddle to Rose while waiting for him to retire. “The word
patience and Justin have never been uttered in the same sentence,” he said.
“Crack-brained” was how Shiret described the notion of an M&S-Sainsbury
merger as a solution to M&S’s succession issue. “You might as well say
there are lots of young people in the UK, why don’t we get some hoodie in
off the street. It’s ridiculous,” he said.
There are other, bigger and more important stumbling blocks to such a deal.
Not least price.
Analysts believe that M&S would be unlikely to move first. If it does bid
for Sainsbury, any offer would probably be in response to one from the KKR,
CVC, Blackstone and Texas Pacific consortium.
Assuming the consortium bid about 550p a share, analysts say that M&S
would need to offer as much as 575p. Considering the shares were less than
half that price three years ago, shareholders may start asking some serious
questions about the timing of such a move.
What is more, Lord Burns, the M&S chairman, is regarded as a conservative
and steadying hand, who would not allow Rose and his executive team to get
too carried away.
There would also be regulatory hurdles to jump. Analysts at Shore Capital, a
stockbroker, estimate M&S has 4% of the UK grocery market, roughly
equivalent to Waitrose, while Sainsbury has about 16.25%. If M&S and
Sainsbury combined they would have less than Tesco with 31.5% but would
overtake Asda.
Competition experts say that even though M&S holds only a small share of
the national grocery market, it has more than 400 grocery outlets, including
stand-alone food stores and food halls in bigger stores. Because the latest
Competition Commission inquiry has deemphasised national market share in
favour of looking at competition at a very local level, it would be likely
to study cross-over locations in the M&S and Sainsbury store portfolios
in some detail and could order the sell-off of many outlets.
In its recent submission to the commission, M&S said that it competed with
all the leading grocery retailers, so it could find it difficult to
backtrack on those comments in the event of a takeover deal.
Clive Black, retail analyst at Shore Capital, points to other problems —
notably the big disparity in rating between Sainsbury and M&S shares. M&S
shares are trading at 17 times future earnings, while Sainsbury stock is
trading at 30 times, so a deal could be very dilutive for M&S
shareholders.
“I don’t think it is a case of simply putting the M&S label
over Sainsbury’s stores and vice-versa. It is far from clear to me that this
is a marriage made in heaven,” Black said.
So Marks & Sainsbury: perhaps not so much dream lovers as the odd couple
after all.
