Getting inside the nation's knickers

ONE has been a stalwart of the high street for more than 100 years, and is a byword for middle-aged, middle-class respectability. The other is a brash and ruthless businessman, renowned as much for vulgar excess as for shrewd money-making. Today they are engaged in a titanic battle of winner-takes-all.

Marks & Spencer, the retailer once associated with underwear and sandwiches but now more likely to be accompanied by the adjectives "ailing" and "struggling", yesterday rejected a £9.1bn offer from Philip Green, the acknowledged king of clothes retailing.

But Green isn't giving up, and is now banking on shareholders losing faith with the M&S board in its ability to turn around the company, and instead will turn to him.

At stake is not just the country's biggest retailer, and neither is it just reviving the fortunes of a brand which once clothed the nation. At stake is the soul of British shopping.

M&S has come to embody the national spirit in a way no other retailer has approached. From the outfits which seduce the demure and straight-laced British character, to the once ubiquitous underwear, M&S has tapped a vein like no other, so much so that the success or otherwise of the company's forays into continental Europe are seen as a matter of national pride.

But Green is no respecter of reputations. He is the man who turned around the fortunes of BhS, whose 160 shops are now worth five times the £200m he paid for them in 2000, and whose Arcadia group, which includes Top Shop and Dorothy Perkins, turned in a healthy £228m profit a year after he took it over in 2002.

For this self-made man, who left school at 15 to sell jeans and shoes and is now worth an estimated £3.6bn, M&S is the sleeping giant of British retail, whose £739m profits last year may sound impressive but are well short of where they should be.

'Philip Green has a history of taking over under-valued retail companies, he certainly believed M&S is worth more than the share price was implying," says Anthony Platts, retail specialist and assistant director at Tees Valley fund managers Wise Speke.

"His whole history is in clothes retailing, and while M&S may have a good reputation on the food side, their major business ought to be clothing, and certainly in his opinion there is great potential there. He thinks he can turn around the business and make it a lot more profitable."

While M&S claims to be on target to increase its profits to £775m, like-for-like sales are falling, and it is still suffering from the sales slump of the late 1990s. Signs of an upturn were visible under former chairman Luc Vandevelde, who appeared to halt the slide, but management were since accused of taking their eye off the ball and the talk was once more of declines and struggles.

Successive recovery plans have since failed to bear fruit, with the Per Una range unable to convince women that M&S can be fashionable, and the attempt to break into furniture, with the Lifestore at the MetroCentre, falling short of expectations. The result is, earlier this year, the company announced plans to shed up to 1,000 staff and set aside £400m to spruce up some of its 375 stores.

Lack of confidence in M&S saw its shares priced at 280p before Green first declared his interest in May, and that they have risen to just over 363p at close of play yesterday has more to do with his bid than with faith in the existing management.

"Philip Green perceives it is largely a supply and distribution problem," says Wise Speke's Mr Platts. "M&S moved its production overseas a few years ago, but he thinks he can source clothing much cheaper. He also thinks there is a whole strata of middle management that is not performing. He thinks the whole structure, the way M&S goes about its business, from service to supply to distribution, is at fault."

For the M&S board, Monday is crucial, for that is when chief executive Stuart Rose, brought in save the company just six weeks ago, unveils his strategy for restoring its fortunes.

Some analysts believe the competitive nature of M&S's various markets is such that losing a share of at least some of those sectors is inevitable. Instead of worrying about overall dominance, they argue, the company should concentrate on shutting its smaller stores and increasing profit margins at the remaining ones, creating a leaner, meaner outfit. But such a radical step is likely to be unpalatable to the existing board.

York-educated Rose, who has a strong track record in retailing and is credited with turning around the Arcadia group, before selling it to Green, is expected to focus on making savings from the supply chain, revaluing the company's property and initiatives to improve sales.

But it will be whether this is enough to convince shareholders that it will work that will determine if they stick with the existing board, or turn to Green as their saviour.

"He has got to convince shareholders and fund-managers that his view of where M&S goes from here is worth more than the £4 a share that Philip Green is offering, and that he is under-valuing the company," says Mr Platts. "If he fails to convince investors and the share price drops or is at the same sort of level it is now, then shareholders will think £4 a share is a better bet."

As well as Rose's prescription for health, Wednesday's trading update will also be crucial, giving an indication of which way the company is heading. Green already has the backing of major investors, including US investment group Brandes, M&S's biggest shareholder, and Shroders investment bank, and if enough of the smaller investors are persuaded to throw their lot in with him, the board will have to cave in and accept his offer.

Even if the board refuses, Green could still attempt a hostile takeover by stacking up the shares among his supporters, although he has so far insisted that he would only proceed if the board recommended his offer to shareholders.

"As of today, it is difficult to say what will happen. The majority of analysts in the city are saying he won't be successful, but that could change on Monday," says Mr Platts.

"I think the current board of M&S has got enough goodwill going for it, Stuart Rose is a highly-respected retailer and why should Philip Green's own team do any better than Stuart Rose?"

If Green does take over, his hallmark of ruthless cost-cutting and a hands-on approach to management will be brought to M&S. Customers may not be enticed by the flamboyance of a Monaco lifestyle and a £5m 50th birthday party in Cyprus, when the retail king dressed as Emperor Nero, but they should see the effect in the shops, in more competitive prices and a sharper eye for the target market.

But even if he fails, the company is in for some radical surgery, as well as an attempt to craft a new image, making it more attractive to the fashion-conscious as well as the thrifty.

"I think Stuart Rose is prepared for a root-and-branch change, while other people have merely tinkered," says Mr Platts. "It will take some time, but I think it is going to be a bigger shake-up than anything they have tried before, and there is going to be a lot of PR work to create a new image."

If the retailing giant which has its roots as a penny stall in a Leeds market 120 years ago is to maintain its position in the national psyche, then a new image may well be the order of the day. Whether that also means a new face is open to question, as the battle for M&S begins.