Institutional investors in Marks & Spencer yesterday gave short shrift to Philip Green's revised 370p-a-share takeover proposal, dismissing the Bhs owner's latest move as summarily as the retailer's own board.
Shares in M&S slid 6.75p to 356.75p, reflecting scepticism that Mr Green would mount a fresh attack. Mr Green was considering his options last night and waiting for feedback about what M&S's top shareholders thought of his approach.
"I've put my best foot forward and we'll see what the shareholders have to say before deciding what to do," he said. He maintained that shareholders were "clearly selling" stock yesterday because they lacked faith in Stuart Rose, the group's new chief executive.
One of M&S's top 10 investors said: "We back the board's rejection of an offer at this level." M&S said 370p a share, which compared with the original offer, worth the equivalent of 332p a share, still "significantly undervalued" the company and its prospects. The degree to which it does will hinge on whether Mr Rose manages to convince shareholders that he holds the key to unlocking the group's potential when he updates them on his plans for the business on 12 July.
Tim Green, a fund manager at Brewin Dolphin, said he was "mystified" by Mr Green's fresh "smoke-and-mirrors" proposal. "He gives you 60p with one hand and takes away a quarter of the company with another," he added, referring to Mr Green's apparent decision to drop plans for making a compulsory equity "stub" part of his bid.
Stuart Fowler, at Axa, said Mr Green would have to offer between 425p and 450p a share before investors would take him seriously. "Clearly the company is focused on delivering full value, so the only reason to sell it would be because someone is paying a premium to full value," Mr Fowler added.
However there was no still no word from M&S's US investors. If Mr Green manages to get Brandes, Artisan and Capital onside, then his chances of bagging the UK's biggest trophy retail asset would soar. Mr Green's camp maintained that he had sounded out shareholders before making his offer, suggesting someone, somewhere would be happy with what was a 37 per cent premium to where M&S's shares were trading before news of Mr Green's intentions leaked out.
Although several shareholders may have declared themselves unimpressed, Sundeep Bahanda, at Deutsche Bank, said the offer was "a decent one". He noted that M&S's rejection could give Mr Green and his backers "further confidence that they are not over-paying which could lead to one final offer". But with Mr Green's backers already providing £7.9bn in debt financing, not to mention topping up the Green family's £1.1bn cash injection with a further £1.9bn in equity, yesterday's multibillion-pound question was: how much higher can he go?
Analysts at Dresdner Kleinwort Wasserstein said the revised funding suggested Mr Green "may be hitting his debt ceiling", given that the majority of the increased valuation had been raised by getting the three sponsor banks to up the equity stake they planned to take. DKW's retail team had previously warned that rising interest rates could "deflate the leveraged buyout bubble, including the potential bid for M&S".
With scant details about Mr Green's funding available, bankers were forced to speculate about the ins and outs of how Revival Acquisitions, the bid vehicle, planned to structure the largest chunk of debt ever amassed in a European public-to-private deal.
One private equity player said: "The sums involved, particularly from HBOS, are big bets. You'd expect to see HBOS [which is putting up several billion pounds in equity and debt] scurrying around to try to get its position down."
Typically, debt funding is split into different chunks, each with different risk profiles depending on the length of each loan. Senior A loans tend to have seven-year maturities, while B loans have eight-year and C loans have nine-year. As the maturity goes out, the pricing goes up to compensate people for not being paid back early. Some of the debt would be mezzanine, which pays a high 10 to 15 per cent return, but as a lump sum at the end of its 10-year maturity instead of annually. Sometimes mezzanine debt can be converted into equity when it matures.
The exact make-up of the debt will depend on Mr Green's plans for M&S's assets once he gets his hands on the business. So-called "bridge debt" rather like the bridging loans that brave housebuyers take out if they want to move but can't sell their existing property would be raised against any disposal plans he has, such as for M&S Money.
But as one private equity source put it: "There are lots of opinions and not many answers on how Philip Green would structure things."
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