Business Analysis: M&S sale of the century comes down to the sum of its parts

The fate of Marks & Spencer could be a sell-off whoever ends up in control
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The Independent Online

Philip Green is nothing if not unique. But last night the rag trade entrepreneur plotting a multi-billion pound takeover bid for Marks & Spencer was in an unusually peerless position in that he alone (his army of advisers notwithstanding) could put a figure on how much Britain's most famous retail business was worth.

Philip Green is nothing if not unique. But last night the rag trade entrepreneur plotting a multi-billion pound takeover bid for Marks & Spencer was in an unusually peerless position in that he alone (his army of advisers notwithstanding) could put a figure on how much Britain's most famous retail business was worth.

City estimates about the value of M&S yesterday fluctuated wildly from £8bn to £11bn. Few expect Mr Green, who is preparing to approach the M&S board of directors today with his putative offer, to bid much north of 350p per share - or at least not in the first instance.

Yet several investors have already warned the self-crowned king of the UK high street that they will not give up their shares for a penny less than £4 per share. And some analysts have suggested that the Monaco resident will need to raise his bid to some 425p per share if he really wants to add the coveted M&S brand to his vast retailing empire, which includes Bhs, M&S's cheap-and-cheerful cousin, and the fashion brands Top Shop and Dorothy Perkins.

So what is the company actually worth? Essentially, when it comes to valuing M&S, the business splits into four constituent parts: its core UK retail operation, spanning food, clothing and home; its financial services arm, M&S Money; its international arm, including its US supermarket division, King's; and its property estate, comprising 365 stores across Britain.

Analysts cautioned that the value of its core retail arm, which made an underlying operating profit of £768m last year, depends very much on how much potential there is for the business to recover. Mr Green, no doubt, will be applying the bare minimum multiple to the group's forecast earnings for this year of 11 times, valuing the retail division at some £5.4bn. Roger Holmes' admission that the recovery had faltered and would take at least two years to get back on track may have cost him his job. But assuming the group stands a chance of winning back Middle England's wallets, buoying its profit margins in the process, then applying the average earnings multiple for the retail sector of 13 times seems fair. This could value the core retail business at up to £7.7bn.

Although Stuart Rose, catapulted in as chief executive late on Monday evening, could tinker with the group's home furnishings business, any move to exit that market would be worth more in terms of money saved than money raised from a sale. Its home business, which has run into difficulties since its headline-grabbing launch by Vittorio Radice in February, comprises just three sites: in Gateshead, London's Kingston and Thurrock. Selling sofas and tables is, after all, indisputably non-core, as is, arguably, Mr Radice.

Meanwhile few see much sense in any attempt to hive off the group's underperforming food arm. "It's just not a viable disposal candidate because it shares too many synergies with the clothing business," one analyst said. Where the potential lies is in selling some of its 100-stand-alone food sites, in particular some of its smaller Simply Food convenience stores that the group admitted last week were not financially viable.

Then there is its Chester-based financial services operation. Speculation that either Mr Green, or M&S's management, may spin off the group's money division has been rife. Selling the unit would help Mr Green to raise the mountain of cash required to win shareholders over, while for Mr Rose a disposal would provide the company with some funds to return to those investors keen to recoup some of their investment while retaining control of the company.

It would also enable M&S to extricate itself from something that many feel it has no business being involved in. UK retailers - barring Gus, the Argos-to-Homebase conglomerate that owns a separate credit checking business, Experian - wised up long ago to the fact that selling clothing doesn't mix with selling financial services. "The competitive advantage retailers had in that area was eroded a long time ago," one analyst said. "M&S shouldn't have invested the money in the first place. It's not a financial services company."

M&S Money, which spent £60m last year launching its combined credit and loyalty card, &more, would be an attractive acquisition for any of the major credit card companies, and the US giant MBNA is tipped as a likely candidate. "It is one business they could quite easily separate," another observer said.

Analysts have estimated the financial services division, which has been ring-fenced as a stand-alone operation, is worth anything from £500m to £1bn. Philip Mitchell, at JP Morgan, says the actual benefit to M&S from a disposal would be double that. He pointed out that the value of any sales tag ignores the upside from removing the "debtor book". "It would take £1bn of debt off its balance sheet, lowering its gearing," he explained. This would allow M&S to factor a share buy-back or special dividend into any potential defence.

Following M&S's extensive, if costly, retreat from continental Europe under Luc Vandevelde, its former chairman, the group's international arm is little more than a sideshow. Its failed attempts to sell Kings, its US supermarket group, are well documented and its decision last summer to hang on to it was borne out of sheer necessity. That said, US retailers operating in the East Coast, where Kings is based, have begun to find life easier, giving analysts hope that M&S might eventually find a buyer. It was touting the division for $200m last time around, so may well manage better.

Of the 162 overseas sites that still carry the distinctive M&S green logo, only its stores in Ireland and Hong Kong are wholly owned, with the rest run on a franchise basis. Although worth a putative £30m, most analysts yesterday failed to see any point in a complete withdrawal from international markets.

Which leaves just the family silver to play for. Its property portfolio - about three-fifths freehold and two-fifths long leasehold - has not been valued since 1988. Then it was worth £2.1bn; today the consensus view hovers around £2.5bn, while the more wildly optimistic ascribe a value of £4bn-plus. Yet even here there are drawbacks. Should the group opt for a sale-and-leaseback deal it would still have to rent back the stores from their new owner.

Mr Rose has already moved quickly to stamp his authority on M&S - notably by installing Charles Wilson, his right-hand man, on to the company's board. A buddy from Mr Rose's Burton days, Mr Wilson has been charged with overhauling M&S's costly supply chain. Steven Sharp, Arcadia's former marketing director, completes the Rose Holy Trinity, raising big question marks over the future of M&S's recent board recruit, retail director Mark McKeon who was hired for his marketing nous.

For a man who has had more than 18 months out of work to figure out what he'd do with M&S, Mr Rose was keeping his strategic cards unnaturally close to his chest yesterday. Much will depend on whether the board chooses to answer Mr Green's famous five questions, or bat down the former barrow boy, opting instead to defend M&S from a hostile bid.