Vulnerable M&S faces pressure for Sainsbury's merger

Published on Saturday 2 May 2009 13:32

RETAIL analysts are warning that a weak set of trading figures from Marks & Spencer later this month will increase pressure on executive chairman Stuart Rose to forge a merger with supermarket giant Sainsbury's.

With the high street chain expected to reveal a slump in sales, speculation is mounting that a tie-up would allow Rose to become non-executive chairman, paving the way for Sainsbury's chief executive Justin King to take a similar role in a combined group.

In March Rose revealed that sales in the first three months of the year had fallen 4.2%, allaying fears of a sharp and uncontrollable downward spiral in business, but still a long way from impressing shareholders. At the time David Buik at BGC Partners described the achievements as "moderate" and said it was no time for Rose to "pat himself on the back".

A merger between two of the most iconic brands on the British high street would create a group with a combined turnover of 25bn. This would still be dwarfed by Tesco's 54bn, giving encouragement that competition authorities would not reject it.

Analysts say a deal would make sense, allowing Sainsbury's to stock M&S-branded food. M&S clothing could also be sold through Sainsbury's stores, providing a powerful boost to the supermarket's non-food business.

Last night one City analyst said there was a "lot of logic surrounding the deal" and suggested a move could come soon.

He said: "M&S have a fantastic property portfolio, there would be huge synergies between the two companies. M&S is strong in non-food, Sainsbury is strong in food and Sainsbury is desperately trying to get into non-food so a deal is a possibility. It would also help to find a successor to Sir Stuart Rose."

Despite Rose persuading the City that the company's profits are going to take a hit while the recession lasts, he has enraged some shareholders by breaching the City's best-practice standards with his twin roles of chairman and chief executive.

City investors and local authority pension funds that hold shares in M&S have demanded that the company appoint an independent chairman or a new chief executive by next summer, and it is now widely expected that Rose will step down long before the mid-2011 deadline set last year.

A potential tie-up between the two has been rumbling ever since Rose let slip at a retail conference in 2007 that his shareholders would consider him "an idiot" if he did not think about mounting a takeover, before adding: "Watch this space."

But since then, the fortunes of the two have changed. While M&S is struggling against a harsh economic climate and the problem of keeping its cost base in check, Justin King has been busy reviving Sainsbury's.

Recent fourth-quarter figures were much better than expected, showing a 6.2% leap in like-for-like sales.

Speculation is also mounting that the Qatar Investment Authority, Qatar's sovereign wealth fund, which holds a 27.3% stake in Sainsbury's, is preparing to increase its shareholding and is keen to merge the two businesses.

Another retail analyst said: "Two years ago M&S thought they would be in charge, but the tide has turned. Stuart Rose will have to retire in a year or two anyway. "If Sainsbury continues to perform well and M&S continues to perform badly then it is something Sainsbury might try and drive through."