Jeremy Warner's Outlook: Herculean struggle awaits Green's M&S bid

Tax freedom day
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The Independent Online

When Philip Green first bid for Marks & Spencer four and a half years ago, he never stood a chance. M & S was down on its uppers, but it was still widely thought a living national treasure, and therefore unassailable. There was no way anyone was going to allow a rag trade upstart such as Mr Green to walk away with what was still at that stage a core portfolio holding for any top drawer City institution. The man was a disreputable chancer, it was widely said, and there was a knowing wink when it emerged that Mr Green's wife had bought shares in the company shortly before Mr Green announced his interest. Was Mr Green really the sort of guy who could be trusted with stewardship of the crown jewels of British retailing? It was easy to answer no.

When Philip Green first bid for Marks & Spencer four and a half years ago, he never stood a chance. M & S was down on its uppers, but it was still widely thought a living national treasure, and therefore unassailable. There was no way anyone was going to allow a rag trade upstart such as Mr Green to walk away with what was still at that stage a core portfolio holding for any top drawer City institution. The man was a disreputable chancer, it was widely said, and there was a knowing wink when it emerged that Mr Green's wife had bought shares in the company shortly before Mr Green announced his interest. Was Mr Green really the sort of guy who could be trusted with stewardship of the crown jewels of British retailing? It was easy to answer no.

Things could scarcely have changed more dramatically since then. M & S has continued to drift and languish, with its much trumpeted turnaround strategy now discredited and very obviously stalled. Meanwhile, Mr Green has flourished as never before, and with a couple of major deals under his belt, he's proved himself both a money maker par excellence and an accomplished retailer. It's become that much harder to rubbish him. Four years ago, he was an untouchable. Today, the cream of the City is queuing up to offer him advice and finance, from Goldman Sachs and Merrill Lynch to Royal Bank of Scotland Group and Barclays.

The world has also changed. M & S is still a wonderful brand, but it's lost the cache it once had. With the big supermarket groups increasingly competing in the same space for both clothing and upmarket foods, M & S is today just another retailer. Mr Green faces obstacles in persuading competition regulators he should be allowed to have more than a fifth of the UK clothing market, particularly in womenswear where his combined share would be above the 25 per cent threshold, yet clothing is these days a commoditised trade. Barriers to entry are low, and price competition has never been more intense. Competition regulators may find it difficult to make the case against him.

Disillusioned and frustrated, most big investment institutions are these days underweight in M&S. Instead, the share register is increasingly populated by short-term traders and hedge fund operators, whose only interest in owning the shares is to turn a fast buck. To them, Mr Green's money is as good as anyone else's. Yet the establishment City view still counts for something, and its attitude to Mr Green's bid promises to be a defining moment in the annals of British takeover history.

To win the City over, Mr Green must surmount a series of obstacles. First and foremost, he must persuade the M&S board to open the company's books to him so that he can conduct a full due diligence. It's hard to believe his bankers will back him without one. Through Bhs, Mr Green is a direct competitor of M & S, so the board might find it easy to refuse. If they do, Mr Green will have to persuade shareholders to put pressure on the board, putting a new fire wall between Mr Green and his prey.

Instinctively, most of the big City institutions won't want to sell to Mr Green. The last big private equity bid for a retailer, Debenhams, struggled to win home. With each one, there seems to be greater resistance. Whether shareholders can eventually be persuaded will depend crucially on how much of the upside Mr Green is prepared to give them through the equity element in his offer. Mr Green is planning to throw some £600m to £700m of his own family money into the equity, but his other main business interests, Bhs and Arcadia, will be kept private. From bitter experience, the City knows that financiers that combine sizeable private and public company interests nearly always spell trouble.

The corporate governance issues raised by Mr Green's bid are therefore legion. Mr Green will attempt to defuse such concerns by recruiting a top notch chairman, in combination with a robust board of non-executives. One name in the frame last night was Dennis Stevenson, chairman of one of Mr Green's financial backers, HBOS. An accomplished businessman, networker and powerbroker, Lord Stevenson would seem just the ticket, having once served as a non-executive director at BSkyB, where he was on several occasions forced to curb the executive diktats of Rupert Murdoch.

Lord Stevenson's commitments as chairman of both HBOS and Pearson will preclude him from taking the chairmanship of Mr Green's vehicle on top of everything else, but I'm told he's already been persuaded aboard in some capacity. His involvement underlines the seriousness of Mr Green's intent. A Herculean struggle is in prospect. The only prediction that can safely be made at that this stage is that it is going to run and run.

Tax freedom day

Tomorrow is the Adam Smith Institute's "tax freedom day". This is the day of the year when the average Briton stops working for the Government and starts working for himself. The yardstick is a contrived one, but it is also a very effective way of illustrating the rising tax burden. What it means is that every penny earned by the average Briton so far this year is needed just to pay the country's annual tax bill. Tomorrow ­ 30 May ­ you are finally free.

Needless to say, that day has been getting steadily later. In 1997, when Labour came to power, it was 25 May. Now it's five days later, having gained an extra three days in the past year alone. The Institute calculates the day by comparing the Budget projections of national income against the total amount raised in taxes. This may be a somewhat crude methodology, but it makes the point as well as any. This year, tax will account for approximately 42 per cent of national income, which is the highest it has been since the early to mid-1980s.

In America, things are going in the other direction. Thanks to the Bush Administration's tax cuts, tax freedom day in the US this year was 11 April, which is the earliest it has been in 37 years. This is partly achieved by running a Budget deficit of truly reckless proportions.

The contention, religiously held by the Bush administration, that the deficit will eventually be magicked away by the superior growth the tax cuts make possible is self serving and naive. None the less, low taxes are a vital ingredient of competitiveness. All other things being equal, the best businesses and the best talent will be drawn to jurisdictions with the most benign tax environment. The Chancellor would argue that all other things are not equal and that he needs to spend more on health, education and infrastructure to make them so.

Even so, Britain's rising tax burden is a growing cause for alarm. My own soundings of business leaders point to Britain as still a relatively good place to do business, but becoming less so by the day. The effect of rising tax and regulation is cumulative. Eventually there will be a tipping point in perceptions when Britain could quite quickly lose its current appeal as Europe's most exciting business economy.

Income tax was originally introduced in Britain as a "temporary" measure in 1799 to help fight Napoleon. By the time of the battle of Waterloo in 1815, it had become permanent. Because rising income tax tends to lose governments elections, the Chancellor has been forced to find steadily more ingenious ways of taxing us more. The only reason people have tolerated it thus far is that most of us have been big beneficiaries of falling interest rates, which over Labour's seven years have dramatically reduced mortgage servicing costs. Now that interest rates are rising again, the trick becomes steadily harder to achieve.

Still, things could be worse. Swedes and Danes have to work until the end of July for tax freedom day. No wonder there are so many of them over here.

jeremy.warner@independent.co.uk

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