Powerful combination in M&S and Sainsbury's

ONE week there are signs that the City is getting frustrated because there are going to be few quick wins at Marks & Spencer, the next there is the prospect of more doom and gloom from Sainsbury's as profits crash as a consequence of the panicky early price-cutting by chief executive Justin King.

In both cases people are wishing for a takeover bid to solve their problems. The disappointing price for the £2.3bn repurchase of M&S shares is already making people think differently about the 400p-a-share offer from Philip Green which enlivened the summer.

It's the quickest case of nostalgia on record, perhaps, as it dawns on more and more City investors that it could be some time before they see that price again.

The continued floundering of Sainsbury's is also increasingly sad to watch. The scent of blood in the water is just the thing to attract private equity bidders, and rumours abound.

The reality, though, is that most private equity houses have mouths substantially bigger than their wallets. Sainsbury's, even in its troubled state, is too big a project for most of them. They also perhaps realise that they have no one to parachute in who would have a clue how to run the business when they have done all they can with financial engineering.

It is amazing that these two icons of the High Street should have come to this. What is even more surprising, however, is that people continue to think of them separately instead of considering how much might be achieved - and saved - by putting the two together.

They are hugely complementary groups, given the way retailing is evolving. It is surely arguable that after a suitable amount of time - say once the Christmas trading figures are known in their full horror - the obvious next step would be for Philip Green to return to the fray bidding for both Marks & Spencer and Sainsbury's.

The driver for his bid would be the intention of fusing the two businesses into one powerful combine which, with the right management, would have the power and scale to get back on even terms with Tesco.

The combination in foods of M&S and Sainsbury's would allow the group to dominate the middle-to-up-market bracket where quality matters as well as price. M&S's expertise in clothing would bring a chance to match the non-food ranges being developed with such success by Asda and Tesco. Combining the property portfolios would provide a great opportunity to relocate stores where they might work best.

None of this would be cheap, of course. But given that Green raised an unprecedented £10bn of backing last time for his tilt at Marks & Spencer, even that should not be an insurmountable problem.

The money would come in the main from the big banks and perhaps from some private equity backers and from shareholders.

This is because, if he is smart, Green will make a better fist of the stub equity component of the bid - first by underwriting it for cash so that no one can argue about its value, second by making it a sufficiently large element of the package that the selling institutions might feel they still have a worthwhile continuing interest in the business and therefore consider it worth backing Green.

Split-cap sense

IT WAS strongly suggested at the weekend that the Financial Services Authority is close to a deal with the parties involved in the problems caused by split-capital investment trusts.

An overall compensation package has apparently been agreed at some £275m, which roughly splits the difference between what the regulator was shooting for and what the industry was prepared to offer.

The biggest contributors to this package on the banking side, according to the report, are UBS, HSBC and ABN Amro. They are putting in £60m between them, while the investment industry has to find £180m, of which £60m is said to be coming from Aberdeen Asset Management and £20m from Collins Stewart.

They are not out of the woods yet, though, because both sides still have to agree the wording of a statement to accompany the deal. Rumour has it the FSA is divided about how hard a line it should take. Be that as it may, the industry is fighting to avoid any statement that would leave the door open to further legal action against it by third parties. For this reason it also opposes pressing charges against former employees.

Resolving these issues will not be easy but there is a mood to get the matter settled so that everyone can move on. If it can be sorted in the next couple of weeks, it would be a good result for both sides, but above all a victory for common sense.

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