Jeremy Warner's Outlook: Green's magical mystery bid needs assistance

Reed Elsevier
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The Independent Online

Is Philip Green's new assault on Marks & Spencer over almost before it has properly begun? That was the question being asked in the City last night after a day of setbacks for the retail financier. Mr Green's opening shot went down like a lead balloon, making it easy for Stuart Rose, the new chief executive, to reject his terms out of hand. He also lost the services of his lawyers, Freshfields, after failing to find a judge willing to grant him leave to appeal against a court order which banned the firm from acting. There's one City adviser already stretchered out of the ring, and we are still only in week one of the fight.

Freshfields' avarice in thinking it could act for Mr Green having already taken the M&S shilling on numerous contractual matters in the past - including the per una deal with George Davies - fair takes the breath away. The old, gentlemanly rules of engagement seem to count for nothing any more. Fortunately the courts have come the rescue by imposing some common standards of decency on the feeding frenzy.

Yet this was no more than a sideshow to the main action which saw Mr Green table his bid only to be greeted with a resounding raspberry. "Derisory" and "not good enough" were the sort of comments on the lips of many of City's leading investment institutions. The fact that the company was going to hell in a handcart until Mr Green came along to electrify the share price and galvanise the board is an irony that the institutions, most of them severely underweight in the stock, seem happy to ignore.

Even so, Mr Green's bid doesn't stack up as presently framed. The trouble lies not so much in the cash element of 290p to 310p a share - the difference dependent on the terms of M&S's contract with George Davies - as the famous stub equity. This was variously valued in the City yesterday as worth anything between 22p a share and 90p. The lower end of the valuation range is arrived at by calculating the effective buy-in price for Mr Green and Goldman Sachs. Together they are putting up £1.5bn for 75 per cent of the equity. Ergo, the other 25 per cent, would be worth £500m, which divided between existing shareholders equates to 22p a share.

That's the wrong way of looking at it, says the Philip Green camp. Instead, you should assume that M&S is capable even on its current depressed performance, and after paying the servicing costs of the debt leverage it will be taking on to pay for the cash element of the offer, of generating around 16p of earnings per share. Put that on a retail sector average multiple of 13 and you get to roughly £2. Divide by four and hey presto! the stub equity is worth 50p a share before Mr Green has even begun to work his magic on the company's operational performance. Assuming Mr Green can do to the M&S operating margin what he did at Bhs, and you can get to much higher valuations.

There's only one problem with this way of valuing the equity, which in itself seems implausible enough. If the stub equity is worth 50p a share or more, then Mr Green and Goldman Sachs will immediately more than double their money, as their own buy-in price was only 22p a share. Shareholders would overnight be giving more than £1.5bn of value away to Mr Green and Goldman Sachs. It looks too greedy to be tolerable and it is. When stub equity was used recently in the successful Morgan Stanley bid for Canary Wharf, all shareholders went in on the same terms. This is very different.

Much was being made of the terms of the per una contract yesterday but this is in truth only a distraction. Mr Green threatens to pay £460m less for M&S if as he suspects the contract turns out effectively to be a poison pill. Yet although this is obviously of great interest to Mr Green, it is irrelevant to M&S shareholders. Indeed, if there is an expensive change of control clause, it only further devalues Mr Green's bid. In any case, Freshfields would have been able to tell him the answer, as it was Freshfields that drew up the contract.

Mr Green is not comfortable under the microscope of public scrutiny and accountability, as was only too apparent from the interview he did with Jon Snow of Channel 4 News last night. The interview was terminated halfway through by Mr Green, who thought Mr Snow's line of questioning on Freshfields overly aggressive. That doesn't augur well for any future he might have as chief executive of a high-profile publicly quoted company. To succeed, Mr Green must bid all cash and take M&S private. He'll struggle to deliver the required premium.

Reed Elsevier

Learned scientific journals are not everyone's idea of good bedtime reading, but they are big business and high-value publications nonetheless. Reed Elsevier made £1.38bn out of them last year, or more than a quarter of its total turnover. The Lancet and other highbrow publications for the medical and scientific communities are for Crispin Davies, Reed's chief executive, a core business and a key driver of growth.

As market leader with approximately 17 per cent of the global market, Mr Davies should be sitting pretty, yet he's under attack as never before from those who want to see scientific and medical research freely available to all over the internet. The Commons' Science and Technology Committee promises next month to produce a report on the issue.

The so-called "open access" or "author pays" model is as yet only a small proportion of the global market - probably no more than 1 per cent - but it's grown rapidly from a standing start only a few years back, and a lot more of it is promised. Backed by some top-drawer funding from the Wellcome Trust and others, there are many who believe passionately that it is the future for scientific publishing.

Yesterday, Reed appeared to make a small concession to the "free to air" lobby. In future, all research that has been approved for publication in one of Reed's journals can be displayed free prior to publication in edited form on the researcher's or institution's website. Researchers can already display their work on their own websites after publication, so the move hardly represents a decisive break in the dam.

Even so, it's a concession which plainly weakens the business model to some degree. First publication rights have been conceded. It is indicative of the pressure Reed is under from its contributors that it has felt obliged to go even this far.

So what sort of a long-term threat does the open access model pose? According to Reed, it costs approximately $3,000 per article to publish research in one of its journals. Most of this money is expended on "peer review", the process under which research is tested for competence, innovation and methodology by other respected researchers in the same field.

Wellcome Trust reckons the same high standards of peer review and editorial selection could be achieved for far less - say $1,900 - but even this is a lot higher than the $500 that represents the maximum per article researchers and universities are prepared to pay. Wellcome proposes to bridge the gap by charging for all articles submitted for publication, including the many that are rejected by any self respecting science journal for being sub-standard.

Even so, it's hard to see what the benefit to the scientific community might be. According to Reed, Britain as a whole would be a net loser from any wholesale move on to the author pays model, as British researchers produce far more research than they consume. The biggest beneficiaries would be the major drug companies, who as things stand consume a lot more academic research than they themselves produce for publication.

Developing nations would get free access to scientific and medical research, but their own researchers would have to pay for inclusion, so nor would they appear to be any better off under such as system. The upshot is that Reed's subscription-based business model looks safe enough, at least for the time being. But just in case, Reed has made itself into one of the leading data bases on the internet through ScienceDirect, as well as an accomplished aggregator of all scientific research, whether published in its own journals or those of others. Whether the open access model makes further headway or not, there will always be those willing to pay top dollar for access to such data, or so Reed hopes.