Shopping For Marks & Sparks

Retail baron Philip Green may make an $18 billion offer that could set off a bidding war

There's a sale on at Marks & Spencer Group (MAKSY ) PLC, but what's on offer is not marked-down hosiery or cotton sheets. Instead, the venerable British retailer itself is up for grabs. The lead suitor is Britain's preeminent retail baron, Philip Green, who wants to overhaul the 120-year old chain and is expected to offer upwards of $18 billion in cash and stock for the chance. That would rank as one of the biggest buyouts in British retail history -- and one of the biggest deals in Europe this year.

Although the purchase offer is still pending -- and the company's board so far has indicated it will oppose an overture -- investors are already big winners. M&S's share price is up 26% since Green announced his bid on May 27, and the stock could go higher if a bidding war breaks out. Buyout firm Kohlberg Kravis Roberts & Co. is said to be interested. A KKR spokesman in London declined to comment. The betting, however, is that Green will prevail. "Philip Green will probably get hold of it," says Robert Gregory, a retail analyst at M+M Planet Retail Ltd., a London consulting firm. "He would like to return the company to its former greatness."

A rival bid would need plenty of ammo, since Green has lined up quite a team. He is planning to approach M&S's board backed by a high-powered consortium of banks, including Merrill Lynch (ML ), Goldman Sachs (GS ), Royal Bank of Scotland, HBOS, and Barclays Capital. The financier isn't making any public statements detailing his planned offer, but people familiar with the bid say he will pay in stock and up to $1 billion of his own cash. Existing shareholders would be able to keep a minority stake in a new listed company that would control M&S.

The allure of M&S is clear. With 365 outlets spread across Britain and a world-famous brand name, it's well-positioned to benefit from Britain's red-hot consumer spending, which has been a strong factor driving the economy. But while most other department stores are prospering, M&S's market share has declined, and its earnings are stagnant. Profits rose just 0.5%, to $1.4 billion, in the year through March, on a 2% gain in sales, to $15 billion. There's another reason to go after Marks & Spencer: It's the turnaround that never happened. Anyone who succeeds at that would be crowned the King of High Street.

Analysts say the problems at M&S stem primarily from uncompetitive pricing, reduced quality, and an uninspired product lineup. "Marks & Spencer failed to anticipate trends and became too quantity-driven, rather than quality-driven," says Edward Whitefield, chairman of Management Horizons Europe, a retail consultancy in London. Ex-Chairman Luc Vandevelde, hailed early in his tenure as M&S's savior, is now blamed for failing to revive its signature women's clothing lines. Many former customers have been lured away by discounters such as Tesco (TSCDY ) and Asda Group (WMT ), owned by Wal-Mart Stores Inc. (WMT ).

If he wins the company, Green is likely to try to squeeze out more profits by boosting efficiencies and adding his own touch with merchandising. No one doubts his ability. Green started out in the retail trade selling imported shoes in London and now rules over a $5 billion retail empire that accounts for 9.2% of the British clothing market, according to retail consultancy Verdict Research in London. Green is famous for his hands-on approach: He insists on personally picking out the ladies' outerwear line at Bhs Ltd., one of the general merchandise retailers he owns. "Philip Green has the Midas touch," says Henk Potts, equity strategist at Barclays Private Clients in London. "He has a unique understanding of what consumers want to buy."

So far, however, the board at M&S has not welcomed Green's advances. His 1999 attempt to buy the retailer failed after M&S made a fuss about Green's wife having bought shares in the company before he announced his bid. While the purchase was cleared by regulators, it led to such unfavorable press that Green decided to back down.

In a move to fend off Green's latest takeover attempt, the company has installed British retail veteran Stuart Rose as chief executive and nonexecutive director Paul Myners as interim chairman to lead a turnaround. These two replace Vandevelde and his chief executive, Roger Holmes, who were kicked out just days after Green made his bid. The reshuffling comes in an attempt to appease shareholders, who've been calling for new M&S management for months. "Rose's appointment makes it more difficult for Green," says Paul Mumford, a fund manager at Cavendish Asset Management Ltd. in London, who owns M&S shares. "It does give some [more] credibility to M&S."

That's because Rose is viewed as a seasoned pro. He started his career as a management trainee at M&S in 1972, rising over the course of 17 years to become commercial director of the European division. From there he held a series of top posts in the industry before becoming CEO in 2000 of Arcadia Group Ltd., which owns trendy clothing chains. While at the helm of Arcadia, Rose is credited with forcing Green to raise his bid for that retailer when he swooped in to buy the company in 2002. But Rose is viewed as more of a steady hand than an avid cost cutter and detail man like Green.


While Green has not spelled out any specific steps for M&S yet, he was quick to slash spending and goose profits in previous takeovers. Take Bhs, formerly known as British Home Stores. When Green bought the housewares-and-apparel chain in 2000 for $370 million, it made $31 million in profits. By last year, pretax profit at Bhs had jumped six-fold to $187 million, on revenue of $1.6 billion. Green engineered the recovery by redesigning Bhs stores, shifting to lower-cost suppliers in Asia and meticulously monitoring the merchandise to weed out sluggish items.

In 2002, Green struck again, buying British retailer Arcadia for $1.6 billion. That company, which owns clothing chains favored by young women like Topshop, Dorothy Perkins, and Miss Selfridge, has also prospered since Green stepped in. Last fall, Arcadia reported that profits for the 12 months through August, 2003, more than doubled, to $418 million, and that revenue rose 3.3%, to $3.3 billion. "He is extraordinarily canny and always stimulating to work with," says Bob Wigley, chairman of corporate banking at Merrill Lynch Europe (ML ) in London.

Green doesn't always bet on a winning horse. His instincts failed him in an ill-fated venture to market blue jeans with actress Joan Collins in 1981. But back then he didn't have a track record -- and a bevy of Wall Street's best backing him. This time the sale could be over before you know it.

By Laura Cohn in London

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