This is not just a takeover… it’s an M&S takeover. Rumours of a buy-out bid have been circulating around Marks and Spencer for several months. However, the interest from private equity firms has little to do with Percy Pigs and more to do with robot technology, says Ron Emler.
Shares in Marks & Spencer are simmering after reaching almost 250p in early December, their highest level for almost three years, on rumours that US private equity firm Apollo Global Management was considering a takeover bid.
That proved the first shot in the arm for the former UK retail bellwether stock in more than a decade. After standing at 595p in mid-summer of 2015 shares had sunk to just 87p in October 2020 in the midst of the pandemic.
Few in the City now expect to see developments before mid-January, if, indeed, the rumours are any more than that. But it is clear that M&S is under the microscope.
From being Britain’s retail flagship in the 1970s and mid-’80s it lost is way dramatically. The likes of Next and Asda (where current M&S chairman Archie Norman made his name in the ’90s) snatched its customers from underneath it as M&S seemed to lose its identity and raison d’être. It became used, not for the weekly grocery shop, but as somewhere to purchase that day’s dinner. And while it majored on small wine producers that it backed under its own label, the trend was on single-bottle purchases, not case sales, as at the likes of Majestic.
That being said, the situation has now dramatically changed. As Ian Lance, fund manager at RWC, said: “Many investors had written off M&S years ago and thus missed the transformative change that has happened under its new management.”
In a telling interview with the Financial Times, Norman said that he was only 40% of the way to the full turnaround of M&S that he is busy engineering. But his changes are already bearing fruit, as evidenced by the recent result, in which M&S upgraded its annual profit forecast from £300 million to £500m.
Private equity houses will not have been slow to note that Norman has done much of the hard work of rejuvenation and that that M&S is now number-two in clothing, and has a greatly improved grocery appeal.
M&S is now much less focused on bricks-and-mortar retailing – note the outcry from diehards about the planned demise of its Oxford Street flagship store – but until it took a 50% stake in Ocado two years ago online sales were stuck at 20% of the total.
E-commerce now accounts for more than a third of M&S’s business, with the food and wine arm’s volumes soaring online.
Ocado is the second prong of interest to potential bidders, especially from America. As e-commerce grows exponentially as the pandemic continues, having a stake in the UK’s leading grocery delivery group is a very attractive prospect. But the interest is in more than simply delivering potatoes and Prosecco.
Ocado is a world leader in warehouse-robot technology. Its patents and expertise are worth billions in future licensing deals globally.
Only last month the US International Trade Commission rejected a complaint that Ocado had violated the patents of a Norwegian robot maker.
The case was brought by Autostore, which uses the Norwegian technology. Autostore is owned by US private equity firm THL Partners, while SoftBank holds a 40%.
Ocado accused Autostore of launching a “misconceived attempt” to disrupt its transatlantic expansion. The case is likely to rumble on through suit and counter-suit but it is evident that the big attraction of a bid for M&S (which at the time of going to press is priced by the market at around £4.2 billion) is not on the UK retailer itself but on its relationship with Ocado, which is priced at £12.5bn, almost three times the worth of M&S itself.
So there is huge profit potential in a bid for M&S, if and when one arrives. A successful new owner would likely leave Norman and his team in place to oversee the retailer’s continuing revival based on their existing strategies – if they could be persuaded to stay.
Nor would there necessarily be expansion of the retailer into the US. M&S took over Brooks Bros for around £500m in the 1990s and sold out ignominiously 13 years later for £153m. It also failed to take off on the Continent.
“M&S has built a strong reputation for its BWS category, building a more diverse and esoteric offering than almost any other grocery retailer in the UK, instead of relying on big brands and the ‘obvious’ choices’,” the drinks business’s retail editor, Arabella Mileham says. “If Apollo is successful in the rumoured bid, let’s hope it continues to champion this ethos. No doubt, its drinks suppliers will be watching the progress of the deal with bated breath.”
