Jeremy Warner's Outlook: Is it enough as M&S lays its cards on table?

Sainsbury vote
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The Independent Online

It's not over yet, by any means, but at this stage, I'd have Marks & Spencer narrowly ahead on points against its assailant, Philip Green. Yesterday's defence was not enough to blow Mr Green out of the water; if it had been, the shares would presumably have surged through the £4 barrier, which marks the level of Mr Green's proposed offer. Instead, they barely moved, which suggests both that the board has failed to demonstrate value well in excess of £4 a share and continued scepticism over Mr Green's chances of success.

It's not over yet, by any means, but at this stage, I'd have Marks & Spencer narrowly ahead on points against its assailant, Philip Green. Yesterday's defence was not enough to blow Mr Green out of the water; if it had been, the shares would presumably have surged through the £4 barrier, which marks the level of Mr Green's proposed offer. Instead, they barely moved, which suggests both that the board has failed to demonstrate value well in excess of £4 a share and continued scepticism over Mr Green's chances of success.

On the other hand, Mr Green cannot yet be dismissed as a spent force. His attack on M&S's defence last night, delivered with all the force and authority of a man at the very peak of his trade, was highly effective in undermining the credibility of the planned cost cuts and supply chain improvements, never mind that Mr Green would presumably go much further once in the chair. Nor should we yet wholly discount the possibility of a rival bid, for what Stuart Rose's presentation yesterday certainly did demonstrate was that in the hands of private equity, there's still huge untapped potential in Marks & Spencer. Why would Mr Green be bidding if there were not?

Mr Green's biggest problem is that he has quite badly boxed himself in, thus severely limiting his options. He's made his offer "final", which means he cannot go higher without breaking Takeover Panel rules, and he's made it dependent on due diligence and a board recommendation, neither of which directors are minded to agree to.

Mr Green seemed to suggest last night that he'd had most of his questions answered already. There were just a few boxes he needed to tick in a "minimal" due diligence that would take seven to 10 days. Yet he still needs a board recommendation. The reason directors don't want to give him even the minimum due diligence he asks for is that it might enable him to go firm on £4 a share. The idea that Mr Green would chisel the price down in negotiation is, as things stand, a key reason for denying him access. If he was able to go firm, the board's position in refusing to recommend at £4 would look weaker, based as it is partly on the possibility that Mr Green will not be able to deliver.

And so the game of bluff and double bluff goes on. Yet by insisting the offer is final and subject to board approval, Mr Green has prematurely shown his hand. As an accomplished poker player, he'll already know that was unwise. Quite how this came about is anyone's guess, for Mr Green isn't yet at the stage where he's prepared philosophically to discuss where it all went wrong. He's still fighting like an alley cat to succeed. Was he badly advised, or were the conditions imposed on him by his financial backers? Mr Green's overtly hostile approach to M&S hasn't helped matters either.

To succeed, Mr Green needs directors to recommend the offer, yet from the moment M&S recruited Mr Rose, Mr Green's stance has been belligerent rather than conciliatory. He's like the travelling salesman who attempts to bully rather than charm his way into your front room. Encouraged by the support of M&S's largest shareholder, Brandes Investments, he also fired his final shot too early. Believing that with Brandes on side he had already won, he announced his £4 a share proposal before M&S had put forward its defence. By all accounts, he and his advisers were left bewildered by the underwhelmed response they received from many other shareholders when they did the ring-round the next morning. They hadn't expected such a lukewarm reception, though it's hard to see why. They plainly hadn't thought it through. Mr Green's only way of winning as things stand is the chance that sufficient shares change hands between now and 6 August, the deadline set by the Takeover Panel, to enable him to force the board into submission. There are already lots of shareholders who want the right to consider Mr Green's £4 a share. Yet to force the board's hand, I would reckon he needs a clear 40 per cent of the shares, which even with Brandes' 11.7 per cent is a tall order. I wouldn't personally put much importance on tomorrow's annual general meeting. This is an excellent forum for disgruntled shareholders to sound off, but it is not the final denouement, for it seems unlikely Mr Green will by then have sufficient signed-up support to force the board to engage.

But nor will he want so soon to throw in his own hand. With so much clear water between the value of Mr Green's proposed bid and the price of the shares in the stock market, there's still plenty of scope for arbitrage - buying shares in the stock market in the hope that Mr Green might eventually be allowed to put his offer. Obviously, such shares would rally behind Mr Green's endeavour. Many of these short-term positions won't carry votes, because they have been accumulated through derivative instruments, but even so it would be hard for the board to resist once support for Mr Green passes a certain point.

All the same, it is an uphill struggle. Time is running out for a proxy fight. The £2.3bn share buy-back announced yesterday, to be accomplished via a tender offer, ought to support the share price at its current level or higher.

A neat trick would be to pitch the tender offer at £4 a share, thus enabling shareholders to receive Mr Green's price in respect of at least a quarter of their shares. The half sale of the financial services arm helps defray the costs without unduly stretching the balance sheet. The declared potential for margin improvement and cost cuts, which presumably is conservatively stated, also provides a degree of earnings support for the shares at the current level.

Details of how Mr Rose is going to restore the M&S brand are on the other hand very thin. To describe M&S as "formal, middle-class and boring", as Mr Rose did in yesterday's presentation, is only a statement of the blindingly obvious, a diagnosis of the problem rather than a convincing programme of treatment.

This extraordinary takeover tussle has a way to run yet before predictions about its outcome can safely be made. At this stage, it's too close to call. The only thing we do know is that once Mr Green gets his foot in the door, it's game over. For the time being, I'm holding my counsel. Should shareholders' rebel against their board, and demand that Mr Green is allowed to put his bid? Or should they instead trust to their board and hitch their destiny to Mr Rose's box of tricks? I promise not to duck the issue for too much longer.

Sainsbury vote

Hardly anyone at yesterday's Sainsbury annual meeting voted in favour of the remuneration report, even though it had been sanitised to remove the offending £2.4m bonus to the former chairman Sir Peter Davis. Hardly anyone that is, other than the family, whose 35 per cent of the total share capital was enough to ensure the board escaped without total humiliation. Outside the family the vote was overwhelmingly against. Some deliberately abstained, but the majority chose simply not to vote at all. That in itself amounts to a huge protest vote.

Lord Levene, the acting chairman, was suitably contrite, yet he couldn't answer the key question about how the board came to approve such a massive bonus in a year when profits fell and the outlook became so grim. The board has said that it sanctioned the bonus on the basis of the information it had at the time. It changed that view after the arrival of the new chief executive, Justin King, who within months of getting into the job bluntly told directors that he'd need to make a massive profits warning.

As one shareholder put it, does that mean Sir Peter had been misleading the board? Lord Levene hid behind his lawyers in giving a non-committal answer. But he didn't miss the opportunity to dance on Sir Peter's grave. Sir Ian Prosser had had the decency to resign his position without asking for compensation. The same, he said, was not true of Sir Peter. No one emerges with any credit from this disgraceful chapter of corporate history.

jeremy.warner@independent.co.uk

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