Shares in the 129-year old high street chain rose sharply towards the end of last week as bid speculation mounted.
Shore Capital analysts Clive Black and Darren Shirley concluded that “nothing firm is currently on the table for the M&S board to consider”. But they added that the retailer was experiencing “a period of sustained transition”.
The group was two-thirds of the way through the change programme, which, on completion, promised to make the firm more efficient and cash generative. Cash expenditure should ease off significantly in the spring of next year year, said Black and Shirley.
While some aspects of its business – such as its UK food operations – were performing “satisfactorily”, its core operations needed attention. “The core element of M&S’s proposition, what it stands for in most people’s minds, is most certainly not firing on all cylinders,” they said. One area in need of attention was ladies’ clothing in the UK.
With the change programme still in progress, this was an understandable time for suitors to consider an approach for M&S. That was because “if the UK clothing performance does improve and cash flows through in due course, then the share prices should be much higher”, said Black and Shirley.
So what price would shareholders accept? Black and Shirley said a starting bid price would be the standard 30% premium to the prevailing share price. That would be a share price of 482p or 15x the 2013/14 earnings per share of 32p. “For some that may be enough to sell but it may be worthwhile highlighting that if M&S’ plans do come together then any suitor may be acquiring the business near ‘trough earnings’ for recent times,” said Black and Shirley.
They added: “a common sense balance” should be struck between near-term reward and long-term gain for the suitor. That would suggest a price range of 480p to 640p with a mid price of 560p, representing 17.5x 2014 earnings.
But shareholders should not be too quick to sell, according to Shore Capital. M&S was “a valuable brand still in the UK with international potential”.
UK food business
“The UK food business is robust and increasingly well run, while M&S has undoubted potential online, albeit we are frustrated by the pace and extent of progress in this quarter,” said Black and Shirely. “There is potential in beauty and home that is gradually starting to be realised but the big prize is sustainably getting ladies clothing right; no small ask but not impossible and presumably what any suitor is thinking about.”
Shore Capital retained its ‘buy’ recommendation on M&S stock.
Meanwhile, Quataris has approached a number of private equity firms about forming a group to bid for M&S, according to reports.
If successful the Middle East financier would add M&S to its UK portfolio, which now includes the Olympic Village in London and Harrods – acquired in 2010.
M&S operates about 700 stores in the UK and its workforce numbers about 78,000.
Last summer M&S refused to confirm or deny reports that it had received expressions of interest from private equity firm CVC Capital Partners about acquiring the business.