Jeremy Warner Outlook: M&S on back foot as Green turns up the heat

Eurotunnel nemesis

With characteristic bravado, Philip Green yesterday declared his bid for Marks & Spencer over, as if it's already in the bag. "There'll be no gloating," he generously adds. Yet I very much doubt that's the case on either count. I perhaps shouldn't grace what is after all only a money-making endeavour of little long-term significance with Churchill's famous observation about the course of the war, but this is plainly not the end, nor even is it the beginning of the end. Yet it is perhaps the end of the beginning.

With characteristic bravado, Philip Green yesterday declared his bid for Marks & Spencer over, as if it's already in the bag. "There'll be no gloating," he generously adds. Yet I very much doubt that's the case on either count. I perhaps shouldn't grace what is after all only a money-making endeavour of little long-term significance with Churchill's famous observation about the course of the war, but this is plainly not the end, nor even is it the beginning of the end. Yet it is perhaps the end of the beginning.

Four pounds a share was always the benchmark price big, long standing shareholders in M&S said they might be prepared to consider, and it is obviously a price that Brandes Investment Partners, M&S's largest shareholder with 11.7 per cent of the equity, would be prepared to accept. Not that the "irrevocable" undertaking it has given Mr Green to do so adds up to more than a hill of beans. The irrevocable only kicks in if the board agrees to recommend Mr Green's bid. The same goes for the 430p a share any rival bidder would have to offer to release Brandes from its undertaking. This is only triggered if the board recommends the Green bid.

Even so, Mr Green has brilliantly regained the initiative. For the first time since all this began, victory appears within his grasp. There are many negatives that can be attributed to Mr Green, but this is certainly one of the most gutsy takeover assaults of the modern age. I cannot think of anyone else on the British business scene today who could command such quantities of top drawer finance for such a huge, and high risk endeavour. Consummate gambler that he is, Tuesday evening was spent not as you might think locked in smoke filled rooms with his bankers, hammering out final details of the financing, but at the Black Jack table in one of London's swankier casinos.

Most of M&S's biggest shareholders were saying last night that Stuart Rose, the chief executive, needs at least to start talking to Mr Green at this level. The board would dearly like to dismiss him out of hand, as it did at 370p a share when it said the offer "substantially" undervalued the company. The difference between 370p and £4 is hardly enough to change that view. Moreover, details of the offer remain sketchy, and there is still good reason to doubt its deliverability. If the board opens its books to Mr Green, there is every chance he will chisel the price down in the subsequent negotiation. Once he's got his foot in the door, there's no knowing where the process will end. Yet the problem directors have got is that there are an awful lot of shareholders who bought in at substantially below Mr Green's proposed £4 a share.

Quite apart from Brandes, anything up to a further 20 per cent of the stock is held by short-term traders - hedge funds, proprietary trading desks and arbitrageurs. An astonishing 8 per cent of M&S's stock changed hands yesterday alone. All these "new" shareholders are in for the turn. What they are doing is taking advantage of a share price which is still substantially below the value of Mr Green's proposed offer. They are gambling on him eventually succeeding, and if his is eventually the best offer on the table, they'll take his money, whatever Mr Rose has to say by way of defence.

Mr Rose was keeping his counsel last night and it is easy to see why. Tactically, Mr Green has played a blinder, firing what he says is his final salvo before Mr Rose has a chance to outline the results of his operational review. Mr Green has stolen the high ground, and Mr Rose will need to be saying something pretty sensational on Monday to get it back again. Either that, or like a rabbit out of a hat, he'll have to produce a rival bidder. With perhaps 30 per cent of the shares behind Mr Green's demand to be allowed a full due diligence, it's going to be hard for the M&S board to resist. Perhaps the best they can hope to do is obtain another 20p a share in return for a recommendation.

The tragedy of this situation is that M&S is worth hugely more. Philip Green will be laughing all the way to the bank if he succeeds at this price. The rush of short term traders to accept his money is understandable enough, but where are the long term holders, the big fund management groups charged with stewardship of the nation's savings and pensions? Disgracefully, they have allowed this once great company to go to hell in a handcart, and now they appear poised to sell it down the river for a faction of its real worth.

For that they will no doubt be paid a handsome bonus for the boost to quarterly performance it delivers. Indeed the only people not making any money at all out the present feeding frenzy are the millions of savers who unknowingly have had their money invested in M&S through thick and thin. On a 10, 20-year view, take whatever long-term perspective you like, M&S has substantially underperformed the rest of the market. Now all the upside is to be given away to Mr Green and the clients of Goldman Sachs. It's yours and my pension pot that will be paying for Mr Green's next floating gin palace.

I'm told that Mr Green is prepared to put Bhs on the block if that is what it takes to persuade competition regulators to allow his bid. Entrepreneurs and financiers invariably attach enormous sentimental value to the business asset that made their reputation and fortune, and nearly always they will take it with them to the grave. It is a mark of how determined Mr Green is to succeed with M&S, and how much money he expects to make out of it, that he is prepared to make such a sacrifice.

And what happens to Mr Rose if Mr Green succeeds. "He'll be lucky to get a job in the kitchen", says Mr Green, who notes ominously that Mr Rose has not yet been given a contract of employment.

Eurotunnel nemesis

Maybe something was lost in translation, but the six-page letter from Eurotunnel's new Gallic masters explaining how the Channel Tunnel operator is to be saved from drowning will have left shareholders none the wiser.

The new board inherited a business with a £6.4bn hole in the middle and not enough revenues to pay the interest bill. Ninety days on from the French revolution which saw the ancien regime swept away, there is no evidence that the new crew is any closer to a solution. The two governments politely said 'non' when they were approached for direct financial help. Perhaps it is because they already know the answer, but the new board has not even sat down to talk turkey yet with Eurotunnel's lenders.

The old slate of directors is criticised for failing to run a tight ship and getting sucked into a price war with the ferries. So does this mean that we will start to see Eurotunnel's staff numbers falling and its prices rising? Ooh la la. It is far too early to say that. There will be a "repositioning" of the passenger shuttle service to emphasis its superior quality and a "re-organising" of prices designed to net Eurotunnel an extra €60m a year, but what all this means in plain English, or even French, is anyone's guess.

As for Eurostar, which is released from its obligation to pay a minimum usage charge in November, 2006, Eurotunnel would like to negotiate a new deal which would be profitable for each party. Since both businesses currently lose money hand over fist, that looks an even trickier circle to square.

Since the last refinancing, the leaking ship has been kept afloat with "stabilisation notes", which enable Eurotunnel to service part of its debt with bits of paper rather than cash. This gets the company out of the bind of paying compound interest. But the stabilisation notes end in December next year when they convert into shares. At that point, the waters begin to rise again.

Bankers will inevitably have to take a huge haircut to put Eurotunnel on a sound financial footing again, but it will be as nothing compared to the small French shareholders who so enthusiastically voted in the new board. If they are not wiped out altogether they will be doing well. The fact that the shares continue to command any value at all is one of the deeper mysteries of the modern stock market. The good news is that the tunnel is not going to close and one day may even be worth something once relieved of its present mountain of debt. But in the meantime managements come and go, as the last one found out in April and the new one may discover sooner than it thinks.

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