I wrote here last month (MW May 13) that the future of Marks & Spencer (M&S) looked most likely to be developed in the private equity markets. I also speculated as to whether Stuart Rose, who sold Arcadia to Philip Green’s burgeoning empire two years ago, might take the helm at M&S and concluded that indeed he might – but only with the prospect of taking it private. I concluded by wondering whether outgoing M&S chairman, Luc Vandevelde, might play a role in the “privatisation” of the old high street behemoth through his private equity vehicle, Change Capital. I didn’t know then and I don’t know now. But I did finish off by saying that M&S should be taken private – and the sooner the better.
As it has turned out, events may move too quickly for Vandevelde – even if he does harbour such ambitions (notwithstanding any restrictive covenants). Within three weeks, Rose had been appointed chief executive of M&S, Green had launched a &£7bn-plus takeover bid for the company that would see it delisted from the Stock Exchange and Rose had rebuffed it as inadequate.
Private equity has played its role, but not quite in the way that I had anticipated. Green’s initial offer included a slab of his family’s equity in the bid vehicle, Revival, worth some &£1.05bn. Green is, of course, renowned for speaking bluntly, as not a few City editors, rather more accustomed to the ingratiating chairmen and chief executives of the public equity markets, have learned over the years. But at least he puts his money where his mouth is. On this model, his money would, in fact, have been on the frontline of any downside valuations after the acquisition of M&S – let’s not be too surprised if he petulantly removes this element of personal risk when he returns with an enhanced cash offer.
But it isn’t just the private equity factor of Green’s involvement that has made the unfolding drama of M&S’s future look like a family affair. The alleged closeness of the protagonists has led to some suspicions of undue cosiness. This was always going to be the case, since Rose was the vendor to Green at Arcadia two years ago and the two men are known to have been more than business associates. Photographs of the pair chinking champagne glasses on the front of newspapers can’t have made for comfortable viewing in the M&S boardroom.
But any suggestion that Green pitched his initial bid unduly low because he expected it to be sympathetically greeted by his old mucker (Green has made it clear that he wants the board of M&S’s recommendation for his offer) is just plain silly. What was more serious was the revelation at the weekend that Rose had been made an insider on Green’s acquisitive plans for M&S as early as May 12. And he was again approached by Green on May 28. There is no question of foul play here, but Rose was certainly a possibility for both potential target and bidder last month.
Rose made it clear early this week that there could only be a case to pursue against him if he had discussed with anyone what had occurred at his meetings, or if he had dealt in M&S shares, which he didn’t. And he’s right. But the story has served to raise issues of conflict of interest. Ironically enough, because conflict of interest has formed an important element of Rose’s initial defence tactics at M&S – almost his first move was to have law firm Freshfields Bruckhaus Deringer removed from Green’s roster of advisers on the bid because Freshfields had previously worked for M&S, when it was in possession of sensitive information.
Rose is clearly planning a highly specific agenda here, but his move on Freshfields can be expected to have far-reaching implications for City firms engaged on takeover bids. Especially for investment banks. German communications group Mannesmann failed to block Goldman Sachs from acting for Vodafone AirTouch on its bid in 1999. Chinese walls have always been the first line of defence at professional service firms in such matters. Rose’s move on Freshfields will be seen as a significant new precedent.
And given that he has acted so swiftly and decisively against this potential conflict, it is unlikely that Rose will allow himself to be compromised in such a way over his dealings with Green. However, I remain convinced that M&S must be taken private to survive and prosper (indeed, private equity firms such as Blackstone, KKR and Texas Pacific are said to be circling).
Of course, private equity markets, where family interests often predominate, are not subject to the kind of transparent regulatory demands of the publicly listed markets. So expect many more allegations of conflicts of interest to emerge before the M&S takeover tale is played out.
George Pitcher is a partner at communications management consultancy Luther Pendragon