We can get too worked up about global equity markets, like environmentalists wringing their hands over the state of the ozone layer, or the dyslexic philosopher who lies awake at night wondering whether there is a dog.
In the wake of Japan and Brazil, I’m not suggesting that there is a case for complacency. It is indeed extraordinary that the effective collapse of an economy the size of Brazil’s should knock down dominoes in Western Europe of such little value – the FTSE 100 last week lost only its post-Christmas gains and, at the time of writing, most of that has been regained.
But all this tells us little about the real state of our economy. While we worry about the globe, we overlook what is happening in our own back yard – or in our own high street. Over the past week, while Brazil was concerned with the world of the real, British retailers have been struggling with the real world.
Three colossi of the British retail market – Sears, Marks & Spencer and WH Smith – last week addressed the real world, which includes high interest rates, very low consumer demand and, in some instances, dozy managements. They did so in strikingly different ways.
Sears, after years of profits downgrades and nettles left ungrasped, had a gun held to its head by Philip Green, with the backing of the Barclay twins, in the form of a 340p per share cash bid. Green has what is euphemistically known as a colourful reputation. The kindest thing I have recently heard said of him in the City is that, if he is bidding 340p per share, then there must be 4 per share of value in it to be unbundled.
Sears has long been seen as a target for a break-up bid. The arithmetic must look attractive for shareholders to support such a move. Sears’ property portfolio has a net asset value of 134m and a sale could knock as much as 1 off Green’s purchase price for starters. A sale of Freemans, which should have been clinched by Littlewoods for 370m in 1997, could subtract more than another 120p from the bid price. And all that’s before you get to the clothing arm and the Creation finance business.
All in all, Green will more than repay the bid price on disposals, while leaving the core retail business intact. After years of mismanagement, that is the only way value is likely to be returned to shareholders. It’s a case of saying thank you, Sears, and goodnight. Fail to deliver and, especially in these markets, you get broken up.
Something for the reorganised management of M&S to dwell on. M&S has had its management difficulties recently, but no one should suggest that it’s in the same state as Sears. On a prospective per earnings ratio of 21, M&S’s shares aren’t cheap, even after last week’s 16.3 per cent collapse to 351p. Sears’ management would never have been given that kind of benefit of the doubt by the City. That said, M&S is in a sorry state. I wrote here towards the end of last year that Sir Rick Greenbury, who had done so much to build M&S into the force it is today, had lost the plot and, despite a management succession plan vested in new chief executive Peter Salsbury, last week’s announcements can only serve to vindicate my view.
Customer loyalty is a fragile possession (and I’m faintly amused to hear that M&S, at this late stage, may be contemplating a loyalty card). Where M&S does bear comparison to Sears is that it has been too inward-looking for too long. Evidence of this is the way that it appeared to watch bemused as its shares tumbled on the back of a profits warning that the year-end could see earnings of almost a half of last year’s 1.1bn.
M&S won’t attract a bid at these levels, but its in-fighting management will be under the City’s cosh. Welcome to the real world, M&S.
Which brings me to WH Smith. Nearly a year ago, I claimed that delay and prevarication on the part of WHS’ management had led to an overpayment for the Menzies business. That supposition, it was drawn to my attention, was based on flawed figures and I’m happy to retract the allegation. Furthermore, chief executive Richard Handover has done wonders in turning around the dismal prospects for WHS, whose shares have outperformed the market by 30 per cent this past year.
But that’s no reason to lose touch with reality. WHS’ shares rose by nearly 25 per cent last week to close at 627p, driven late in the week by a 5.6m deal to buy educational publisher Helicon and deliver an Internet service. I wrote last November that there was a dangerous hubris in Internet stocks – a line that has subsequently been developed elsewhere. Net bookseller Amazon.com has now built a market capitalisation about double that of Sears.
This Internet hubris is hardly WH Smith’s fault. But it might responsibly choose to dampen City expectations, where a fiver can be turned into a 50 note simply by writing “Internet” on it. WHS needs to put the deal in perspective. It would be a pity if, just as Sears and M&S joined the real world, WHS was to leave it.