Jeremy Warner's Outlook: Wonder as Apax returns for new go at Woolies

Breaking up is hard; Green/Rose détente
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The Independent Online

Gerald Corbett, the chairman of Woolworths Group, seems to have played it just right. With the retail environment in sharp decline, many doubted his wisdom when he turned the venture capitalists, Apax, down flat at their initial offering of 50p to 55p a share. Now they've come back with the curiously precise figure of 58.2p, and though this is not yet a done deal, there's more reason to believe it might be deliverable this time than with the opening shot.

Since then Mr Corbett has sat down with Apax and explained some of the complexities of the business, in particular the highly seasonal nature of the company's cash flow, which is concentrated around Christmas. He's also introduced Apax to his bankers, Royal Bank of Scotland Group, who know the company's funding needs and have said they are prepared to help finance the deal. This gives some cause for comfort that the price won't be chiselled away in the due diligence that will now take place.

The more interesting question is quite why Apax should want to buy Woolworths in the first place, with the heavy lifting already done, the low-hung fruit well and truly plucked, and a deteriorating trend in high street spending. One reason might be that with about 1,000 stores nationwide, it's the last biggish retailer left that is within private equity's grasp. The management team Apax is backing is the same that has made a success of Robert Dyas. It may be that by switching the emphasis away from pic 'n' mix and toys to household goods they can achieve the same at Woolies.

Yet the suspicion has to be that private equity is simply running out of options. There's so much private equity money now looking for a home, that the managers are being forced to accept ever lower returns to ensure it's invested.

To my mind, Philip Green's assault on Marks & Spencer, and his subsequent failure to secure the prize, was a defining moment. With the stock market partially recovered from the depths it sunk to two years ago, the potential for deals is ever more thin on the ground. Add to that worries about pension funding and a recently announced crackdown by the Inland Revenue, and it may well be we have already seen the high watermark of the private equity bubble.

Breaking up is hard

Managements must nowadays pay as much attention to what their hedge fund shareholders are saying as their long-term investors, unpalatable though their demands might seem. Here today, gone tomorrow, they are extraordinarily difficult to deal with in any kind of a meaningful way. Often they have their own agendas and don't want to listen to what directors have to say anyway. Yet once they have bought their shares, they are as much owners of the business as more traditionally minded, long investors. Directors ignore them at their peril, as Werner Seifert, the chief executive of Deutsche Börse, recently discovered when he was forced to abandon his intended bid for the London Stock Exchange.

Arun Sarin, the chief executive of Vodafone, may, I fear, be heading for a similar stand off with short-term shareholders over his strategy in the US and Japan. Both regions are proving problematic for Vodafone. The company's presence in the US is through Verizon Wireless, America's biggest mobile phone company. Unfortunately, Vodafone is only a minority shareholder with 45 per cent of the stock. The other partner, Verizon Communications, has management control of the company, which it is exercised much to the irritation of Mr Sarin by suspending dividend payments. Both partners would like to buy out the other, but neither want to sell. It's a question of who blinks first.

With more than $40bn of debt, Verizon Communications is theoretically in the weaker position. Yet Vodafone faces pressure too, not from its bankers, but from the growing band of shareholders, many of them hedge funds, who are urging Mr Sarin to sell the stake and distribute the dosh. Mr Sarin is already returning quite a bit of capital to investors through share buy-backs and bigger dividends. Some shareholders want more. It is not at all clear how this poker game is going to resolve itself. Mr Sarin reckons he is better able to afford the loss of dividends than his opponent.

What's more, the money Verizon Wireless saves on dividends will be used to pay down debt, which progressively makes the equity worth more to Vodafone. Neither of these arguments seem to cut much ice with short-term investors, or their supporters among longer-term holders. The Verizon stake might be worth anything between 20p and 25p a share, representing a substantial potential return of capital.

Much the same case can be applied to Vodafone's Japanese business, which though highly cash-generative, is going nowhere as things stand. Its failure is partly down to customary Japanese aversion to the foreigner. From access to new spectrum, to legal attempts to block the introduction of pre-pay mobile telephony, Vodafone has found itself constantly obstructed in the Japanese market.

But nor has the company helped itself. Vodafone has arrogantly attempted to impose European technologies and fashions on the Japanese market. It is hardly surprising it met with such strong resistance. In any case, the argument for keeping Japan on the grounds that it is a useful sounding board for state-of-the-art developments in mobile telephony is hardly a compelling one. Vodafone is under pressure to bail out of Japan too.

Yet all is not yet lost to the cash-hungry short termists. Managements can sometimes convince even their hedge fund investors that there's merit in a longer term approach. One example of this is GUS, where outside the understated presence of John Peace, the chief executive, there's little that obviously holds the four main legs of the group together. Break it up and flog 'em off, would be the usual refrain for a company which contains four such obviously attractive businesses - Burberry, Experian, Argos and Homebase.

Mr Peace has managed to defuse these calls in part only because he's ordered a strategic review, which though still more than a year away from completion, is highly likely to order an eventual break-up anyway. Yet he's also managed to resist pressure for immediate action by successfully arguing shareholders can realise more by being patient. With the share price close to its all-time high, even the speculators cannot be too unhappy.

Green/Rose détente

Is this reconciliation, or mutual commiseration? Stuart Rose, the chief executive of Marks & Spencer, was spotted this week deep in conversation with Philip Green over dinner à deux at Harry's Bar in London's Mayfair. It is only possible to speculate on what was said. Green: "Looks like I stuffed you when you saw me off at £4 a share. I'd never have bid that much anyway, but now you're saddled with it." Rose: "I'll turn this company around or die in the effort." Green: "See you on the other side, then."

The sudden appearance of sunny spring weather may be helping a bit, but otherwise, the situation on the high street continues to look grim, especially in clothes retailing. Both Mr Green and Mr Rose are feeling the downdraft. In an attempt to stop themselves being left with a mountain of unwanted stock, both are knocking the stuff out at anything up to 50 per cent discounts. There are only two decent stories in big league retailing right now - Tesco and Argos. The rest are struggling.

Five interest rate hikes seem to have done the trick just as ordered in slowing consumption growth. Is the Bank of England really going to impose a sixth? Still too early to say for certain, seems to be the attitude of the Bank of England's Monetary Policy Committee, which means the Government can at least rely on it not being this side of the election. Green to Rose: "Bet my fall in sales is smaller than yours."