One of the more challenging prospects fo shareholders in retail groups – and the managements that they appoint – during the period of consolidation that is currently being embarked upon, is the natural price inflation that accompanies too many predators pursuing too little prey. It’s like a model of the domestic property market, and we know what happens towards the end of that particular cycle.
I’m prompted to make this observation by the emergence of two takeover bids this week in the retail world – WH Smith for Menzies and Halifax for Birmingham Midshires (don’t let anyone tell you banking isn’t a retail game), the former by agreement and the latter rather more hostile.
Both these deals have their roots in last summer. Turning to the WH Smith case first, apparently a deal was tentatively struck last June by sometime chief executive Bill Cockburn, as he was passing through WH Smith on his way to BT from the Post office. The price aired at that time was of the order of 50m to 55m.
So close was this deal to Cockburn’s own files that WH Smith was unable to find anyone else capable of closing it until Richard Handover stepped into the breach and picked up Cockburn’s paperwork.
By that stage, Menzies’ management had put together a plan for a management buyout assisted by Alchemy which, being a venture capitalist firm, is rather more used to turning deals around with alacrity than are more sleepy public company managements.
WH Smith, under the chairmanship of Jeremy Hardie, is widely reckoned to have dragged its heels on the appointment of a new chief executive as, indeed, it has dragged its heels over developing a growth strategy for the late 20th century, let alone a strategy for the early 21st. As a result, Handover, who must be blameless in this scenario, was presented with the prospect of letting the Menzies opportunity slip away, or returning to it with a premium offer.
It remained a sufficiently attractive prospect for him to opt for the latter. And so the price is now 65m. Part of the attraction of the 230-strong Menzies chain is said to be the 10m or so that WH Smith will be able to claim in cost savings as a result of rationalising the combined businesses. It would, of course, be impolite to point out that WH Smith is now paying some 10m more for Menzies than it would have done had the deal been struck last summer. It would be even ruder, therefore, to point out that those cost savings will be paying the price of a half-year’s delay by WH Smith’s management.
It’s not all bad news, though, and one shouldn’t be too cynical. Menzies, under new chief executive David Mackay, will be able to hasten its drive into cargo-handling logistics at airports through the WH Smith deal and doubtless the presence of some 100 WH Smith airport stores is complementary to this strategy. I just wonder what Stuart Rose, now chief executive of Argos and facing the acquisitive attentions of Great Universal Stores, makes of it all – he was originally approached for the seat at WH Smith and would presumably have moved all this along rather faster and to the benefit of WH Smith’s shareholders.
Then there is the first contested takeover bid for a building society. Way back last summer, Royal Bank of Scotland (RBS) was thought to be overpaying for Birmingham Midshires. Since then, bank shares have risen by some 30 per cent, reflecting not only the bonkers bull market in equities generally, but also the narrow market for consolidation opportunities in the banking sector.
Halifax reckons that Birmingham Midshires may be worth anything up to 800m, compared with RBS’s 630m. The Brummies, meanwhile, are stuck with an exclusivity deal with RBS and are consequently unable to hold discussions with Halifax. This may well be in the best interests of the incumbent management – life with RBS will probably be considerably more cosy than it will with what is described as Halifax’s slash and burn policy of consolidation. But it hardly seems to be in the best interests of Birmingham Midshires’ members, which is the nearest thing we get to shareholders in this situation.
The answer may be to appeal to these members over the heads of the management. The members, after all, stand to make considerably more out of Halifax than out of RBS. This would be an intriguing principle – a kind of respectable version of Andrew Regan’s ill-fated plan for the Co-operative Society last year.
Of course, shareholder value is unlikely to be best served by Birmingham Midshires declining a dance with Halifax because it’s already spoken for by RBS, anymore than shareholder interests were best served by WH Smith’s management delaying more than half a year over Menzies and ultimately paying 10m more than it need to have done.
It strikes me that there are going to be major opportunities for shareholders in the retail sector during the coming months of consolidation. It also strikes me that those shareholders are not going to be best served by somnolent managements who are anything but on their toes.