Marks and Spencer: Tender Offer - Case Study Example

Marks & Spencer: Tender Offer Executive Summary Marks & Spencer is unattractive and overvalued firm operating in the UK’s retail industry. Currently, the firm owns more than 11 per cent market share with strong presence of stores throughout the country. The company offers food and clothing products to the customers. Although the company has vast experience in the retail industry, yet it has failed to provide more attractive actual performance to the shareholders and potential buyers. First, P/E ratio is comparatively less and unattractive when it is compared with the ratio of TESCO; the same is also true for enterprise value to sales ratio which is the highest one when it is compared with the ratios of the competitors. This ratio becomes useful when a firm is undervalued. Unfortunately, the ratio of M&S is the highest one, showing that the firm is not attractive nor is undervalued but overvalued. Moreover, the enterprise value to sales ratio and enterprise value to EBITDA ratio are also unhealthy when it is compared with the competitors’ ratio, demonstrating that the firm is overvalued and less important and attractive as well. However, EBITDA to sales ratio is comparatively better but this does not ensure that the firm is worth buying as the share price bid offer is also lower than the current market value of the company, showing that the current market value of the firm is overvalued. At the same time, the weaknesses indicate that the firm has no strong marketing and advertising strategy and has no tendency for using the modern communication technology for reaching new customers. Review of UK and Global Economy Global economy has been fastly recovering and improving as well. For example, American dollar has recorded phenomenal growth against multiple currencies including Australian dollar, Chinese Yuan, Euro and pound sterling. This is mainly caused by increase in employment figures, controlled inflation rate, and diminishing interest rates and unemployment rates as well. Similarly, the UK economy has showing the similar path as the recent economic indicators signify that the overall business environment and economic activities are gaining momentum. For example, in 2014, the UK’s GDP records 2.8 per cent growth rate which is comparatively highest in last 9 nine years (Khan, 2015). This clearly demonstrates that economic activities, commerce, trade, and financial activities display strong optimism about the UK business environment and it is this environment that has enabled many firms to look for more ways for gaining more ground in the UK economy. Based on this perspective, the UK’s retail sector is also fastly recording important growth recently. Review of Target Company Sector Retail sector is the most important segment and hub for economic and commercial activities in the United Kingdom. The British Retail Consortium (BRC) details that the UK retail sales increased by 1.6 percent when it is compared with the last year’s January retail sales (Bruce and Evans, 2015). BBC (2014) reports that the UK retail sale growth record a 10 year high in the month of April 2014. Based on this situation, it can be deduced that the UK’s overall retail sector is booming over the period of last three years as the global economy experiences more stability and growth during this period. Company Information Marks & Spencer (M&S) is the UK’s leading retail giant. The M&S came into existence in 1884; the firm provides retail services in food and clothing, having 798 store in UK, 455 international stores, 85,613 employees, 10.3 billion pound group revenue, UK turnover is provided by 55% and 45% food and general merchandise respectively (Key Facts, 2015). This basic company information reflects the magnitude and potential of this company for long term profit which has higher chances of stability and growth not only for the current shareholders but also potential common and institutional investors as well. More importantly, the M&S has around 11.18 per cent market share in the United Kingdom’s retail industry (Butler, 2014). Company valuation and cross evaluation Graph 01: P/E ratio comparison Source: (Yahoo Finance, 2015). The price earnings ratio (P/E) is a valuation ratio which compares share price with the earnings of per share. It is assumed that the higher the P/E ratio, the more the chances for increased earnings of the share price. In the graph 01, P/E of three retail firms is being depicted. The 16.39, 19.74 and 6.96 reflect the P/E ratio of M&S, TESCO and Sainsbury. Based on this graph, it is easy to pinpoint that the TESCO has the highest P/E ratio when it is compared with the ratios of M&S and Sainsbury during the period, reflecting that the shareholders of TECO has expecting more earnings than the expectatiosn of M&S and Sainsbury. In this regard, it is important to highlight that the ratio difference between M&S and Sainsbury is considerably smaller when this difference is compared with the gap between TESCO and Sainsbury ratio, reflecting that the shareholders of M&S are expecting more positive and encouraging financial and operational performance from the management of M&S. Graph 02: Enterprise value to sales ratio comparison Source: (Yahoo Finance, 2015). This ratio represents a cost essential to buy a firm’s sales; and the benchmark is that the lower this ratio, the more attractive and undervalued that company is (Investopedia, 2015). Based on this standard, it can be deduced that the M&S’s Enterprise value to sales ratio is the highest one when it is compared with the ratios of other competitors in the above mentioned graph 02. Subsequently, it is reasonable to extract that the graph 02 depicts that, currently, M&S’s ratio is overvalued and it is considerably expensive for the new and potential investors to buy this stock. This piont is also substantiated by the fact that the ratios of M&S, TESCO and Sainsbury are 81.18, 31.59 and 20.96 respectively, clearly showing that both TESCO and Sainsbury are considerably undervalued when they are compared with the ratio of M&S. Graph 03: Enterprise value to EBITDA ratio comparison Source: (Yahoo Finance, 2015). For valuing a company, this ratio is considered to be most important and effective for various reasons. First, this ratio takes into account earnings by deducting depreciation and other non-cash items that are mostly included in the earnings and profit of a firm. More importantly, the benchmark is that the lower enterprise value to EBITDA ratio would reflect undervalation of the firm (Investopedia, 2015a). M&S’s ratio remains the highest in the graph 03. The Enterprise value to EBITDA ratio for M&S, TESCO and Sainsbury is 699.22, 573.87 and 361.33 respectively. Based on this situation, it is easy to understand that Sainsbury has the lowest ratio whereas the M&S has the highest ratio, reflecting that the M&S is overavalued whereas TESCO and Sainsubry are undervalued when they are comparativley analysed. This analysis makes M&S less attractive as it has the highest Enterprise Value to EBITDA ratio in comparison with the ratios of the competitors in the same industry. Graph 04: EBITDA to sales ratio comparison Source: (Yahoo Finance, 2015). This ratio compares earnings before interest, taxes, depreciations and amortizations with sales ratio. In this regard, it is important to highlight that the higher this ratio, the more attractive the company will be as this would indicate that the company has been able to retain higher earnings with regard to sales. M&S has the highest EBITDA ratio as reflected by the graph 04. In the year of 2014, Sainsbury, TESCO and M&S record 5.81, 5.5 and 11.62 EBITDA to sales ratio respectively, clearly demonstrating that the M&S has been able to generate and report the highest EBITDA to sales ratio. In this regard, it is important to mention that this valuation ratio is the only single indicator that has a positive outlook for the M&S. at the same time, this also shows that the other indicators are comparatively less attractive and stable when they are compared with the related indicators of competitors (i.e. TESCO and Sainsbury). SWOT analysis (1600 words) Strengths M&S owns more than 11 percent UK market share. This remains the biggest strength for the company as the majority of the business operations are carried out in the United Kingdom. In this regard, it is important to mention that the firm has outnumbered and outshined many of its competitors by offering a variety of retail services in the UK market. Weaknesses It has been highlighted that the firm has not been able to develop and implement an effective marketing and advertising strategy for attracting and retaining the customers’ loyalty. In this regard, it is pertinent to highlight that the recent market indicators highlight that new competitors, such as ASDA and Chinese competitors’ entry into the UK retail sector has severely threatened the market position and market share of retail giants. Due to the weak and ineffective marketing strategy, the new entrants are gaining grounds and making it hard for M&S to retain its customers and their loyalty. More importantly, it is reasonable to highlight that the new entrants are offering more attractive and inexpensive retail shopping options to the customers. As a result, this makes the whole industry very competitive where it is almost impossible to retain the previous year sales growth and performance. At the same time, it is relevant to mention that the M&S’s slowness to adopting to new methods of communications and interactions with the customers is also a major weakness as the use of new technology is being availed by the competitors in the UK’s retail industry. Opportunities Social media websites and use of technology for accessing to current and potential customers are those new trends that offer a very attractive future to retail giants in the United Kingdom. for example, electronic commerce is gaining recognition in which customers are not required to physically visit stores instead they are given opportunity to become virtual shoppers by using the modern methods in the form of electronic commerce and electronic buying as well. Through opening up more electronic stores, the M&S will be able to retain its existing customers besides it will have an opportunity to access new customers as well. Threats The retail industry is getting more competitive day by day. This competition is mainly caused by the fact that the new entrants have introduced more inexpensive products for attracting the customers. At the same time, this strategy has several consequences for the M&S. first, this would decrease their market share and the firm would not be able to retain its current performance level. Second, this would decrease their sales and would increase their cost of doing business as well. Overall, this would decrease the M&S’s profitability and performance as well. Part three Assumptions The above mentioned table is based on certain assumptions for computing the net present value of the M&S. first; it is assumed that the operating cash flows of the firm would be constantly increasing at the rate of 10 per cent per annum. This is assumed because the existing retail market has strong potential to make and record higher performance through improving the sales. For example, the global economy is stable and growing as well. and the same is also reflected by the UK economy which as recently touched the mark of 2.8 per cent GDP growth rate in the year of o214, highlighting the level of optimism in the UK’s retail industry and overall business climate as well. Additionally, after adding a constant 10 percent growth in the cash flows from operations, WACC has been used for generating present value of the future cash flows and subsequently, all figures of each year have been combined in front of the present value box in the above table. Additionally, the total offer for acquiring this firm is £9,000,000,000. And from this price, total amount of present value (i.e. 8,669,936,000) has been deducted. After deducting this amount, the remaining amount is net present value. Subsequently, this present value is further divided by the number of shares. And the number of shares has been obtained by dividing the total price of shares mentioned in the balance sheet of the M&S. and in order to reach total market value, balance sheet value is divided by the market share price of M&S; this brings the total number of shares. After finding the number of shares, NPV amount is divided by that number of shares. Subsequently, this brings the future market share value of M&S and this amount can be used as a bid offer for acquiring the M&S.   2013 2014 2015 2016 2017 2018 cash flows 1,140,000,000 1,130,000,000 1,243,000,000 1,356,000,000 1,469,000,000 1,582,000,000 Wacc (8.08) -92112000 -91304000 -100434000 -109565000 -118695000 -127826000   1,232,112,000 1,221,304,000 1,343,434,000 1,465,565,000 1,587,695,000 1,709,826,000               Present value 8,559,936,000                         NPV 9,000,000,000-8,559,936,000                         NPV 440,064                         Bid offer 440064000/1420074                                       Bid offer 309.8880763           Analysis, conclusion and recommendations Currently, per market share price of M&S is £438 whereas the bid offer price is £309.88. Consequently, the offer bid is considerably lower when it is compared with the current share price. Based on this, it is reasonable to suggest that it is appropriate to avoid buying this company as the current share price is highly overvalued than the actual value of the firm. In other words, it is recommended that the BOD should not buy this company and this position is also supported by the company valuation provided in the first part of this report. First, the P/E ratio is not attractive enough for buying the company. And this is also supported by the ratio difference when it is compared with the ratio of TESCO, which is higher than the ratio of M&S. this proves that the shareholders are not expecting much higher earnings when it is compared with the P/E ratio of the TESCO. Additionally, enterprise value to sales ratio is the highest when it is compared with the ratios of competitors mentioned in the graph 02. It is a benchmark that a lower enterprise value to sales ratio signifies that the firm is undervalued besides being attractive. However, unfortunately, this is not the case with the potential target company as it has the highest enterprise value to sales ratio in comparison to TESCO and Sainsbury ratios. In this regard, it is pertinent to highlight that the potential target company is undervalued. In other words, it is not attractive for buying as the current share price and the mentioned ratio are overvalued. As a result, they do not represent the actual potential and possible performance of the firm for potential buyer of the company. Similarly, enterprise value to EBITDA ratio is also overvalued and unattractive as well. in this regard, it is important to point that the ratios of Sainsbury and TESCO are comparatively attractive and undervalued as well when they are compared with the ratio of M&S, clearly demonstrating that the earnings and potential of these earnings cannot be justified in the long run and potential buyer would not be able to extract attractive returns in the future as the current valuation and performance of this company is already overvalued. In this regard, it is also relevant to highlight that the enterprise value to EBITDA is the highest one, showing that the company is not performing in a way that shows its real and actual performance instead the shareholders are expecting higher performance. At the same time, it is reasonable to deduce that the competitors (Sainsbury and TESCO) have recorded the undervalued and attractive performance when it is compared with the enterprise value to EBITDA ratio of the M&S. Furthermore, EBITDA to sales ratio is comparatively attractive than the competitors’ ratio, reflecting that the EBITDA is more promising for the existing shareholders and potential buyers as well. However, this single positive and attractive feature is not sufficient enough to take away the effects of the above mentioned factors and actual performance of the M&S. Moreover, in the SWOT analysis, it has been clearly highlighted that the company has failed to use the modern technology methods for accessing to new and existing customers. And due to this slow usage of the modern communication technology and inadequate and ineffective marketing and advertising strategy, the M&S is fastly losing its market share in the UK retail industry. At the same time, the competitors are offering more attractive offers to the UK retail shoppers through using the different modern communication methods and means. As a result, it is reasonable to conclude that the M&S is not attractive and viable option worth purchasing as it has failed to provide practical strategies to counter the pressure of competitors in the UK retail industry. References BBC, (2014). UK retail sales growth hits a 10 year high in April. BBC News. Available: http://www.bbc.com/news/business-27498468 . Accessed: 29 March, 2015. Bruce, A., Evans, C. (2015). UK retail sales growth accelerates in January-BRC. Reuters, Available: http://uk.reuters.com/article/2015/02/10/uk-britain-retail-brc-idUKKBN0LE00I20150210 Accessed: 30 March, 2015. Butler, S. (2014). Marks & Spencer losing clothing market share faster than rivals. The Guardian. Available: http://www.theguardian.com/business/2014/mar/31/marks-and-spencer-losing-clothing-market-share-faster-rivals Accessed: 29 March, 2015 Investopedia, (2015). Enterprise value to sales ratio. Available: http://www.investopedia.com/terms/e/enterprisevaluesales.asp Accessed: 29 March, 2015 Investopedia, (2015a). Enterprise value to EBITDA. Available: http://www.investopedia.com/terms/e/ev-ebitda.asp Accessed: 29 March, 2015 Khan, M. (2015). UK economy grew at fastest rate for nine years in 2014. The Telegraph. Available: http://www.telegraph.co.uk/finance/economics/11505763/UK-economy-grew-at-fastest-rate-for-nine-years-in-2014.html . Accessed: March 29, 2015. Key Facts, (2015). About US: Key Facts. Available: http://corporate.marksandspencer.com/aboutus/key-facts Accessed: 29 March, 2015 Yahoo Finance, (2015). Marks & Spencer. Available: https://uk.finance.yahoo.com/q?s=MKS.L Accessed: 29 March, 2015 Read More