Barclays gamble with £590m GUS mail order takeover

Twins risk regulatory block in order to consolidate steadily declining catalogue market
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The Independent Online

The secretive Barclay brothers staked a huge gamble on Britain's mail order market yesterday when they agreed to pay £590m for the GUS home shopping business in order to merge it with the Littlewoods retail empire they acquired last year.

The wealthy twins, who own the Ritz Hotel in London,have not made the deal conditional on regulatory approval even though the combination of the UK's top two mail order giants runs the risk of being blocked by the competition authorities.

The deal will give the combined group about 70 per cent of the UK's agency mail order sector, which has historically seen housewives act as agents for friends, family and surrounding streets. It will also have about 30 per cent of the wider catalogue shopping market which includes newer rivals such as Next Directory. The group's huge portfolio of catalogues would include names such as Kays and Marshall Ward.

However, the Littlewoods chairman, David Simons, expressed confidence that the deal would gain regulatory approval, saying the combined company would have less than 3 per cent of the non-food retail market in the UK. He also said the market for the old-fashioned agency style of mail order was declining at such a rate that some businesses could disappear completely if consolidation was not allowed to take place.

He said: "Agency has been in terminal decline and what we are keen to do is undertake a repositioning and revitalisation of the industry. We know that GUS was looking at closure and run-down [of their mail order business].We represent an acceptable alternative." Analysts' views were mixed. Richard Hyman, head of the retail consultancy Verdict Research, said: "I'd be surprised if there are not competition considerations on this. In the UK market they will have an overwhelmingly dominant position. In the past the regulators have had a very clear view on this."

David Aitman, a competition lawyer at the top City law firm Freshfields, said: "I suspect it will be challenging. The crunch for them will be to show a strong price constraint from conventional retailing or from the internet that forces their prices down to a competitive level."

One City analyst disagreed, saying: "A few years ago this deal wouldn't have stood a prayer. But in the last few years the internet has arrived and there is far greater access to credit . I think they'll be all right."

At first reading the precedents are not good. In 1997 the then Trade and Industry Secretary, Margaret Beckett, blocked Littlewoods' £365m takeover of the Sears-owned Freemans. The deal was quashed on the grounds that it would have given the top two players 80 per cent of the agency market to the possible disadvantage of shoppers for whom the weekly payments to their catalogue represented their only access to credit.

But Littlewoods pointed to a later decision by the European Commission in 1999 which cleared the takeover of Freemans by the German group Otto Versand as offering a useful reference point. The Commission conceded that the home shopping market had changed rapidly in recent years with a "blurring between direct and agency and even between home shopping and high street".

Mr Simons said the explosion in easy access credit together with the arrival of discount retailers such as Matalan, Primark and the George at Asda label meant there was plenty of competition for agency mail order businesses. The rapid growth in internet shopping was another factor as was social change which meant that the idea of buying goods from an "agent" next door was increasingly unusual.

He said: "It belongs to a bygone era, in a sense, together with the football pools and the Tupperware party. People used to have a social context for buying and selling. You'd have these little entrepreneurs who would go round their local housing estate. But things have changed beyond all recognition."

These days about 80 per cent of mail order "agents" are not really agents at all. They do not sell to other people and only place orders on behalf of themselves and their families. Prices remain high as a result of the "bundling" together of the price of the product together with credit terms, delivery and agent's commission and this has contributed to a huge slump in the market which is down by about 30 per cent in five years.

Both the GUS and Littlewoods mail order businesses have their roots in the early part of the last century. GUS was founded in 1900 in Manchester by two businessmen, Abraham and George Rose. Originally knows as Universal Stores it changed its name to Great Universal Stores in 1930 and was listed on the stock market in the following year. A key turning point of the business was the arrival of Isaac Wolfson as managing director in 1932. He made the business a retail powerhouse which was run by the Wolfson family until the late 1990s.

Littlewoods was founded by the late Sir John Moores in Liverpool in 1932. He had already started a successful football pools business and built up an empire which at its peak was one of the largest privately owned companies in the country, spanning mail order, high street stores and football pools. The Moores family sold the pools business in the 1990s and then the remaining retail interests to David and Frederick Barclay last year for £750m.

The merger of the two home shopping businesses will create a business with annual sales of £3bn and 30,000 employees. There are certain to be fears of widescale job losses as both businesses have overlapping call centres, distribution networks and head offices which are only a few miles apart.

Littlewoods declined to give details on job losses or the potential synergies the deal could yield. However, there could be a political dimension as most of the affected areas are Labour Party strongholds.

Mr Simons said he hoped to raise profits at the GUS business where margins are only 2 per cent of sales compared with 6 per cent at Littlewoods. The GUS business being sold achieved profits of £35m on sales of £1.7bn last year. Littlewoods is expected to record group operating profits of £70m for the year to April, with most of this coming from the mail order operation.

The Littlewoods chairman said he would cut the cost base at the GUS operation, improve database marketing to develop more targeted catalogues and attempt to move customers away from agency to direct order catalogues.

The deal includes GUS's Reality distribution business which used to trade under the White Arrow name. At the peak of the internet boom, logistics enterprises were billed as potential winners on the assumption that start-ups would use these extensive fleets to deliver their wares. But the boom failed to materialise.

For GUS the deal severs its last remaining link with its mail order roots. But the City welcomed the disposal which leaves GUS focused on its Argos and Homebase retail operations and its Experian financial information business.

The deal is structured in two parts with £450m payable on completion and the remaining £140m payable over three years. The valuation compares with a net asset value of £800m, with analysts attributing the discount to the possibility of the deal being blocked by the regulators.