Business View: Green needs more of the green stuff for this bid to work

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The Independent Online

So, Philip Green is "having a think" this weekend. It's going to be 28C and sunny in Mon-aco, so it won't be too much of a strain. In the next few days, he's going to have to decide whether to put a lot - and I mean a heck of a lot - more cash in his bid. Or to concede defeat in a battle with Marks & Spencer for the second time in a little over four years.

So, Philip Green is "having a think" this weekend. It's going to be 28C and sunny in Mon-aco, so it won't be too much of a strain. In the next few days, he's going to have to decide whether to put a lot - and I mean a heck of a lot - more cash in his bid. Or to concede defeat in a battle with Marks & Spencer for the second time in a little over four years.

The pugnacious tycoon doesn't like losing. He doesn't like discussions either. He showed that by terminating a Channel 4 News interview and then trying to prevent them showing it. If Mr Green gets wound up by Jon Snow asking him a few tough questions, how is he going to react to bolshie institutions and irritating small shareholders? He might like shouting at people, but that's not the way to get a following in the City.

Which brings us to the soft underbelly of Mr Green's tilt at M&S, the equity element. At best, the potential bid would deliver £7bn of cash and a 25 per cent share in the new company owning M&S. This has been valued at between £500m and £2bn. But, to many institutional investors, this value is largely academic. They do not want to hold shares in this business. It is too riddled with problems.

Last week, I mentioned the conflicts of interest if Mr Green still owns Bhs and Arcadia. Now add in the conflicts caused by the senior non-executive director being the chairman of the second- largest investor, HBOS, which also happens to be the largest lender to the company.

Then ask yourself about how Mr Green and his family are financing the £1.05bn they are investing in the vehicle. Mr Green is not short of a bob or two - having taken £230m of dividends out of Bhs. But even if all this money is ploughed into the M&S vehicle, this still leaves an £820m gap. This equates to more than four times the annualised post-tax profits of Bhs and Arcadia at current levels, and Mr Green has no other big liquid assets. The only way he can get his hands on ready cash is to sell or mortgage his interests in his two other retail businesses.

When I put this to Mr Green's camp, I got the equivalent of the Channel 4 brush- off. Q: How are we sure Mr Green has the £1.05bn available? A: He has a letter from a bank. Q: Which one? A: Not telling. Q: What has he pledged to get this letter? A: What does that matter?

So long as there is this equity element, the bid has a problem. As Morgan Stanley, which is defending M&S, found when it bid for Canary Wharf, unless you give a full cash alternative to the stub equity element of a bid, the shareholders don't want to play ball. Mr Green says he has £9bn of finance committed for the cash consideration for an M&S bid. He will need all of this to put a credible bid on the table and maybe a bit more if he is going to tempt M&S shareholders.

So while Mr Green is thinking, he could ponder how to turn that £1.05bn banker's letter into real cash.

BAE's cover story

BAE Systems' £355m knockout bid for Alvis was a surprise. Not least because BAE had been briefing that it wasn't going to trump General Dynamics' existing offer.

According to BAE, the change of heart came when a group of hedge funds told it they'd accept an offer higher than GD's. BAE's reply was, "only if this is irrevocable". As BAE has 28.7 per cent of Alvis, the hedge funds' 16.2 per cent would give BAE control. Game over.

Except this doesn't quite ring true. I hear Goldman Sachs, acting for BAE, contac-ted the shareholders, indicated what might be on the table, and asked whether they'd give irrevocable acceptances if BAE bid at that price. They said yes. The rest is history.

Which begs the question of when BAE had its change of heart. Or if it had a change of heart. Because a cynic might ask whether BAE always intended to outbid GD and was using the old "off the record" briefing technique to try and get the price down.

j.nisse@independent.co.uk

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