Jeremy Warner's Outlook: Credit crunch makes mincemeat out of Marks & Spencer turnaround story

Taylor Wimpey is denied its new equity; Death wish at Bradford & Bingley
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The Independent Online

This is not just a profits warning, this is an M&S profits warning. Sir Stuart Rose says he has been forced to develop a thick skin in his four years at the helm of Marks & Spencer, and it is becoming thicker all the time.

Yet he's going to need the hide of a rhinoceros for next week's annual meeting, where he now faces angry questioning not just on the corporate governance issues surrounding his elevation to the chairmanship but, after yesterday's unscheduled trading update, on the M&S recovery story, too. If it was ever real in the first place, today it looks to be in deepest peril.

Only a year ago, the shares were riding high. Sir Stuart was being fêted in the City for having pulled off a remarkable turnaround. Now he seems to be back to where he started. Sir Philip Green would be killed in the rush to accept were he to retable his mooted £4-a-share bid today. There is, by the way, no chance of that happening. Even if he felt romantically so inclined, in today's straitened banking environment, no one would lend him the money.

As it is, M&S yesterday shed nearly a quarter of its stock market value in response to a profits warning which prompted analysts to call into question Sir Stuart's previously assumed ability to walk on water. At £2.40, the shares are back to where they were seven years ago.

Sir Stuart reasonably protests that the company would be on its back but for the actions taken in the past four years, yet, if he has saved M&S from the knacker's yard, the stock market refused to acknowledge it. On the face of it, the core clothing business is doing even worse than foods, yet it is the foods boss, hired by Sir Stuart from Waitrose little more than a year ago with a £500,000 golden hello, who is getting the bullet.

The difference, Sir Stuart says, is that in clothing the company more than held its own. The 6.2 per cent fall in like-for-like sales reported for general merchandise in the 13 weeks to the end of June is said to be no worse than the market as a whole. The 4.5 per cent like-for-like fall in food sales, on the other hand, trails major rivals by some distance – and, as Sir Stuart freely admits, a large part of it is self-inflicted.

M&S has failed to respond fast enough to changing shopping patterns. As a purveyor of a limited range of high-quality food, it has found itself left behind in the dash by consumers to the bottom on price. Amid generalised belt-tightening, there is also some evidence of consumers giving up the occasional top-up purchases which are M&S's bread and butter for the single shop at a cheaper rival.

All the same, to sack the foods boss only four months after he joined the main board smacks of scapegoating. Either that, or it calls into question Sir Stuart's judgement in recruiting him in the first place as well as the boss's grasp on a vital part of the business he's meant to be in overall charge of.

Sir Stuart deserves all the praise he has received for taking M&S past the £1bn mark on pre-tax profits, but he must now be prepared to take the blame as they plummet back down again to a likely £700m or less this year, with perhaps worse still the year after. A profits collapse of this scale cannot be blamed on market conditions alone, difficult though they plainly are. Sir Stuart says the dividend is safe. We'll see.

Corporate governance concerns and yesterday's profits warning are in truth different issues, but that won't stop investors making the connection. Should Sir Stuart have been allowed to take on absolute power as executive chairman given the very challenging circumstances the company now faces? Many will think not.

Taylor Wimpey is denied its new equity

Oh dear. If you are going to announce that bankers have made raising new equity a condition of waiving lending covenants, you had better be pretty sure you are going to get it. Having said it needed £500m of new equity, Taylor Wimpey was yesterday forced to admit the begging bowl had come back empty. This leaves the beleaguered housebuilder in an even more dangerous position than it was already.

Leading shareholders are said still to be ready and willing to cough up the necessary, but the outside investors needed to make up the balance got cold feet. Who can blame them? The news flow on the housing market over the past month has been unremittingly poor to catastrophic. Had Taylor Wimpey been trying to raise new capital against the backdrop of the London blitz, it could scarcely have faced a tougher challenge.

Having tried and failed, Taylor Wimpey finds itself in the same place as Barratt Developments, with its share price too low to allow a meaningful issue of new equity. Yet though the company may now be close to worthless, it is not yet the end of the line. The one thing housebuilders have got going for them is that their bankers are in some respects in even worse shape than they are, and really have no option but to waive lending covenants whether there is new equity or not.

To pull the plug on a major housebuilder such as Taylor Wimpey would make a bad situation in the housing and property markets very much worse, with the consequent firesale of assets triggering a veritable collapse in land values.

As it is, Taylor Wimpey is being forced to write off £660m worth of a £3.9bn portfolio. Whether this is enough is open to question. Ominously, Pete Redfern, the chief executive, warns that if house prices fall by more than 10 per cent, there will be further writedowns to come. Net assets are eroded correspondingly.

This might seem scary to investors, but it is even scarier to holders of the company's £1.7bn of debt. Bankers can ill afford the write-offs involved in either an administration or a debt-for-equity swap. With balance sheets already stretched to breaking point, they have little option but to sit tight and hope the storm eventually passes.

It promises to be a long wait. What began a year ago as a squall in the mortgage-backed securities market has turned into a fully blown mortgage famine, leaving housebuilders with too much land bought at top-of-the-market prices, too much overhead and too much debt.

Dresdner Kleinwort said in a circular yesterday that there is a real danger the company will collapse when covenants are tested next February. Bankers are desperate to avoid such an outcome, but if conditions get much tougher, there will be only so many companies they can afford to keep on life support.

Charles Bean, the new deputy governor at the Bank of England, said yesterday that he anticipated a second round of bad debt write-offs among the banks. The early stages of the banking crisis, which saw massive impairment (sorry, fair-value adjustments) of mortgage-backed securities, leveraged loans and other forms of traded credit, are about to give way to a more conventional bad-debt experience as the economy heads towards recession.

Death wish at Bradford & Bingley

There is nothing a journalist likes more than the sight of someone throwing themselves off a cliff. A suicide successfully executed nearly always makes for a better headline than tragedy averted. All the same, it's hard to applaud the advice the UK Shareholders' Association is offering private investors in Bradford & Bingley.

The UKSA is urging them to vote down the proposed capital injection by Texas Pacific, and there is actually some chance that it will get its way. B&B needs 75 per cent of those voting to proceed. Small shareholders still account for nearly 40 per cent of the total. In practice, few of them are likely to vote, but if they choose en masse to follow the UKSA's advice, then the company is almost certainly history.

No Bradford & Bingley shareholder much likes the Texas Pacific solution, which rides roughshod over pre-emption rights and involves considerable dilution. Yet in the absence of any funding alternative – Clive Cowdery has bowed out – they have little option but to go along with it. If B&B doesn't get its money, confidence will evaporate, and there is a real possibility of the bank ending up in the same position as Northern Rock.

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