Deal volumes may be in the doldrums, but that doesn’t mean the City’s finest can’t theorise.
Analysts at Credit Suisse issued a report on Friday arguing, over 112 pages, that while British fashion retailer Next has serious structural problems, the business has real strategic value and might attract a bid from its bigger rival, Marks & Spencer, at £20 a share or more.
An extract:
We have concluded that the problems faced by Next are more structural than we had previously thought. We are not sure whether a fundamental recovery will be achieved. We also believe, however, that Next has significant strategic worth and that this should increasingly be reflected in its valuation as the market appreciates the extent of its structural challenges.
In this context we have reviewed possible takeout scenarios and in particular considered the merits of a scenario in which Next is bought by Marks & Spencer. M&S have never publicly expressed an interest in Next, but we believe this would significantly enhance M&S’s strategic prospects. We believe M&S could clearly pay a significant premium for Next with the benefit of synergies and the use of some of the enlarged group’s borrowing capacity. Our unchanged target price of 2,000p balances fundamentals, our DCF (£23) and acknowledgement that this company has great strategic worth.
M&S is not known as an acquisitive animal, although it did buy Brooks Brothers in the US and is widely believed to have contemplated a takeover of J Sainsbury last year.
But a a £4bn bid for Next pitched at a 50 per cent premium to the prevailing share price?
Nick Bubb, the retail watcher round at prime broker Pali International is not convinced, but has circulated an alternative idea to clients:
An M&S bid seems a bit far-fetched. The alternative scenario we would focus on is that Next might well go private, given the very low rating and share price relative to management share option incentive targets (of over £25…). Given the scope to sell off Ventura and refinance the Directory debtors, Next is a very attractive target for private equity, if they had the money to bid.