Buyouts: Philip Green’s M&S venture
Philip Green, a British retail billionaire, is perhaps best-known for the controversy surrounding the pensions deficit of his defunct BHS high street chain. But this extract from a new book by Sebastian Canderle, a former Carlyle director, tells the story of an earlier episode in the fashion mogul’s career: his unsuccessful attempts to take over the Marks & Spencer shopping empire
Because sales growth at BHS had stagnated, critics matter-of-factly observed that Philip Green’s miraculous machine had run out of steam. The businessman argued that it was still work in progress. He was planning to make ranges more fashionable and to improve the products and the supply chain.
Indeed, difficult trading conditions warranted caution. In late 2003, BHS and Arcadia did not enjoy the best Christmas period, even if Green did not acknowledge it, refusing to issue sales figures for either group.
On the personal front, however, Green knew what to do with the dividend he had paid himself. Heading out for a spot of shopping, he added a multi-million-pound private jet to his superyacht and Monaco penthouse.
His special kind of retail therapy was not restricted to purchasing personal luxury goods. The question everyone wanted answered was how long it would be until his next deal. So, in the spring of 2004, armed with the irrepressible drive and uncompromising obduracy of the entrepreneur, he launched Operation Socrates, a plucky bid for his main rival on the high street – Marks & Spencer (M&S).
It was the third time Green was going after Britain’s leading – but dozing – fashion retailer, having tried his luck while at Amber Day, and again shortly before acquiring BHS. Considered the jewel of the British retail crown, Marks & Spencer had just seen its stock hit a year-low after announcing disappointing results. The group had lost some of its lustre in recent years following the fragmentation of consumer segments, but also due to its brand positioning, primarily serving the 40-year-old-plus consumer. Incidentally, M&S’s pre-tax profits had declined from £1.2bn in 1998 [then about €1.7bn] to less than £800m six years later, while sales had remained flat. Would it be third time lucky for Green?
His main challenge, despite unmatched credentials in turning around faded retailers, was the sheer size of the deal. At £10bn, the enterprise value towered over Green’s own empire. Could it even be financed with the usual blend of hefty leverage and puny equity injection? He was prepared to fork out £600m to £1bn, not an inconsequential chunk of his £3.5bn fortune, but he needed to find £9bn of external financing. He called in the help of Bank of Scotland, the lender behind his Arcadia buyout.
Everyone agreed that M&S, Britain’s most famous high street brand whose stores offered grocery as well as clothing, had failed to react to the fast-fashion methods recently enforced by a new breed of retailers. M&S would buy 50,000 items for an entire season where Zara would bring in 5,000 items one week and then another 5,000 the next, but the range and style would be slightly different each time. That approach required a different supply chain.
“Green slowly grappled with the unfamiliar feeling of not getting his way. Despite the strong backing of Goldman Sachs, Operation Socrates failed in the face of fierce opposition from the City establishment”
To win over the crowds, Green made a proposal for Lord Stevenson, the chairman of Bank of Scotland, to become senior non-executive director of the company once the acquisition had taken place. But the ailing target was not willing to remain idle in the face of the onslaught. In June 2004, it appointed as new CEO, Stuart Rose, the chief executive of Arcadia until its acquisition by Green two years earlier.
Armed with a £1.25m ‘golden hello’ and a potential £2.1m ‘golden parachute’ should M&S be sold, Rose’s explicit brief was to torpedo Green’s proposal. His appointment coincided with the elevation of non-executive director Paul Myners as interim chairman. Both had a battle on their hands.
Another obstacle for Green’s bid was that the stock of the target had risen 40% since rumours of his interest had first emerged. In early June 2004, in what would have been Europe’s largest leveraged buyout (LBO) and take-private to date, the earnest entrepreneur submitted a cheeky offer: a blend of £7bn in cash and equity worth £2bn in Revival Acquisitions, the investment vehicle set up for the occasion and to be floated on the timidly regulated Alternative Investment Market.
Given the City’s lukewarm reception, a fortnight later Green raised his offer to £11.9bn, or 370 pence a share. To fund the bid, he secured about £9.4bn in LBO loans, plus equity contributions from Goldman Sachs and Bank of Scotland, diluting his stake to 44%.
For M&S shareholders, the dilemma was whether to retain their shares in a focused, even if dated, national institution that was part of the FTSE 100 index, or to hold a minority stake in a highly leveraged entity controlled by Green and listed on a second-tier stock exchange. There was also the small matter of valuation: shareholders felt that the target was worth 400 pence a share, not a penny less.
Aligning himself with the market’s expectations, in July Green upped his final proposal to 400 pence, with £1.6bn of his own money, for an enterprise value in excess of £12bn and an operating profit multiple of 14.6 times. It was swiftly spurned by the company’s board as significantly undervaluing the group. The board believed that shareholders would be better off if they gave new chief executive Rose a stab at a proper turnaround. To make the pill easier to swallow, they were offered a share buyback plan and dividend payouts worth more than £2bn, partly financed through the disposal of Marks & Spencer’s financial services arm.
Green’s third approach ended the way the previous two had. He was considered too much of an uncouth, disreputable chancer for the City to let him take ownership of such a cherished, if troubled, high street name. M&S’s management, shareholders and advisers had conspired to stiffly rebuke his advances. Perhaps some City professionals found it hard to stomach that their backing of Green’s Sears, BHS and Arcadia acquisitions had helped turn the bombastic dealmaker into Britain’s fourth-richest man.
Not prepared to overpay for what most observers considered damaged goods, Green slowly grappled with the unfamiliar feeling of not getting his way. Despite the strong backing of Goldman Sachs, Operation Socrates failed in the face of fierce opposition from the City establishment. Almost 2,000 articles had appeared in the press during the seven weeks of the bidding process, so giddy was the reaction towards, often against, the retail entrepreneur.
For now, BHS and Arcadia would have to sate Green’s appetite for glory. Yet there was no question that his ambition could not be satisfied by the existing portfolio of assets.
Sebastien Canderle is a former director of the Carlyle Group and author of The Good, the Bad and the Ugly of Private Equity (2018). This is an edited extract from his book