I recall having predicted significant consolidation in the retail industry as early as the first quarter of last year. Admittedly, at the time I thought that equity markets looked a bit inflated and that consequently, merger activity would be driven in part by the desire of retail groups to exploit the value of their paper before it was too late.
The collapse in equity values last summer turned out – touch wood – to be a false dusk, and share prices have continued to touch fresh highs. Whatever the vulnerability of these sectors, the protracted bull market has stretched the merger horizons for retail groups.
And so it is that the likes of a 19bn merger between Kingfisher and Asda is only now coming through.
One could suggest that this sort of deal, like the on-off-on flotation of Goldman Sachs, calls the top of the market. You wait until what you consider is the absolute maximum valuation of your equity capital before consolidating at the best terms for your shareholders, and before share prices disappear into the abyss of correction.
It could also be suggested that when companies the size of Asda and Kingfisher talk of economies of scale – it’s suggested that some 4bn of turnover could be pooled to yield cost savings of anywhere between 40m and 80m – there is a suspicion that two mediocre groups are just being put together to form a bigger mediocre group.
It can certainly be observed that these two companies have not done themselves any favours with the strength of the denials which were issued just ahead of last week’s announcement. Price sensitivity is an enormous responsibility and burden to companies under these circumstances – particularly when a deal is as widely rumoured as this one.
But to say that no such deal is planned is arguably just as price sensitive. It’s also true that the technical City term for this is “lying”. The stock market – in which the currency is information – is an unforgiving place when it comes to information that, for one reason or another, it finds it cannot trust.
But no matter. The deal is done. With cross-selling of lines, the operational savings could be in the order of 100m, half of which may be delivered in the first year. The market will like that. It will also like the apparent synergies supplied by the deal. A strong balance sheet and combined cashflow should allow Kingfisher good scope to expand its DIY and electrical arms in Europe and to further develop its out-of-town Big W sites.
I say that the deal is done, but what the market will like even more is if a contested bidder enters the fray. As things stand, this is a domestic issue, but it could become a cross-border one if Wal-Mart of the US, Carrefour of France or the Dutch Ahold decide to raise the stakes with a bid for Asda.
There are those, for all the talk of merger, who interpret this as a Kingfisher takeover of Asda, and a takeover on the cheap at that. This is a little unfair. Before Asda’s shares took off on Friday when the proposed deal was announced, the Kingfisher paper on offer valued Asda at 5.8bn or 190p a share, which represented a premium to Asda’s shareholders more than 12 per cent over the market valuation.
It was, of course, in both parties’ best interests, since this is an agreed bid, for this premium to be portrayed as robust as possible. Hence, no doubt, the vehemence of the denials before Friday’s announcement – motives were not, perhaps, only driven by the purity of the Stock Exchange’s requirements.
But that premium has now all but disappeared, as Asda’s shares have risen by more than 30 per cent and Kingfisher’s have faded by some six per cent.
Asda’s shares had been depressed by the shadow of the referral of its sector to the Competition Commission over pricing policies to customers and suppliers. Kingfisher’s advisers would argue that Asda’s shareholders will be investing in the future growth of the enlarged enterprise. But that may not stack up much against a bigger wedge from one of those foreign contenders.
While I’m at it, a further point about synergy benefits. The two chains have let it be known that they believe these might amount to as much as 100m following their merger. The principal benefit in this regard will be the increased leverage that the merged group will be able to apply to suppliers. I just wonder if that is the most diplomatic point to be made when the Competition Commission is looking into that very issue.
For all these reasons, I would suggest that this merger story has a very long way to run. The overriding issue is competition – that is, competition from potential contested bidders and competition policy, as defined by the authorities.
I have a feeling that what was announced last Friday will turn out to be the opening shots of a consolidation in retailing that will see foreign contenders buying into the UK market, with the new Competition Commission calling the shots.
Then, by the time this process has reached a conclusion, the equity markets will have shifted sufficiently for it to be time to de-merge all over again. Sometimes, it really is that simple.