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The clothes of Marks & Spencer have never been very trendy and in recent years it has struggled to keep out of the red, so it was a godsend when UK fashionista Alexa Chung’s tip about a suede skirt helped the British high street store to its first annual profit in four years in its last full fiscal year.
M&S’s troubles have since returned, claiming the scalp of chief executive officer Marc Bolland just last month, but for Chung the relationship appears to have gone from strength to strength. Desperate for another lucrative sales bounce, the 132 year-old retail chain just signed her up to oversee a 31-piece womenswear collection.
However, unless the Chung magic lasts, M&S is unlikely to see its long-term fortunes change.
So what if instead of relying on Twitter dressing tips, M&S turned to the more meaningful support of China, an increasingly popular destination for struggling UK companies?
An obvious potential suitor is Sanpower Group. The Chinese company bought UK department store House of Fraser for £480 million ($697.4 million) in 2014, marking the largest outbound retail merger or acquisition by a Chinese company.
House of Fraser has since reported record like-for-like annual sales and jump in profits, and also outperformed its rivals during the recent key Christmas period.
House of Fraser could next become a partner of internationally renowned British toy store Hamleys, which was bought by Chinese shoemaker C.banner for around £100 million in October 2015.
Sanpower chairman Yuan Yafei is keen on the sales merits in China of the UK high street’s biggest names and plans to open the first House of Fraser store in China later this year. He has told journalists in the past that mainland citizens attach something of a cachet to many UK brands, which speaks to the power of British marketing, as well as the deliberate efforts of the UK government to cultivate closer corporate ties with the world’s second-largest economy.
Sanpower is not the only Chinese corporate to have snapped up UK brands. Lenovo Holdings’ Hony Capital bought PizzaExpress in 2014 for £900 million, China’s Bright Food Group acquired breakfast cereal producer Weetabix for £1.2 billion, while Geely Holdings Groups in 2013 bought Manganese Holdings, the maker of London’s black taxi cabs, for £11.04 million.
And what shopping brand is more quintessentially British than M&S? It may sit a lot closer to the back of the fashion race than the front but its multipacks of shirts, socks, and underwear, range of sensible shoes, and cashmere pullovers are the staple for many people. Its food, meanwhile, is marketed – and priced – as just slightly upper-end.
It’s in this steady if unspectacular niche that M&S has been able to earn its crust for decades.
Not just any market
However, much like its clothing line, M&S’s earnings have been steady but unspectacular for a long time.
The company reported a £600 million pretax profit for 2014/15 that was 3.4% up on the previous year. But sales of £10.31 billion ($14.98 billion) were almost flat and its international revenues were down 5.7%. Its subsequent half-year results released in November showed a marginal improvement, with group sales up a meagre 1.4% at £5 billion and pretax earnings climbing 6.1% to £284 million.
But since then the group’s performance has deteriorated again. Despite a record Christmas for food sales, M&S’s newest three-month trading statement showed a 5.8% drop in like-for-like clothing and homeware sales, scuppering Bolland’s legacy after almost six years in charge and spurring his resignation.
As a result, the M&S share price has remained under pressure, closing February 3 at a 14-month low of 409.5 pence.
As part of its turnaround efforts M&S has tried to crack China but it has been a patchy performance so far, with the retailer closing five stores in the summer in and around Shanghai.
Still it hasn’t given up yet, with a new flagship store opened in Beijing just this December and Guangzhou also in its sights.
M&S also enjoys a presence in Hong Kong and to judge by the stream of tourists going through its doors, it clearly has a mainland Chinese fan base.
The company already has some local connections, having hired Hong Kong-based brothers – Mark and Neal Lindsey – to streamline its global supply chain and slash costs. But linking up with Sanpower could give it the extra edge it needs in China. The Chinese conglomerate has heft and reach, and its consumer arm could potentially give M&S the sort of distribution possibilities the UK company would struggle to attain under its own power. M&S would also offer Sanpower a solid brand that, with a bit of marketing pizzazz and capital, might just begin to reinvigorate itself.
The likes of Uniqlo, H&M, Zara, and Gap have already successfully demonstrated the possibilities in China for low-cost international clothing companies, but they tend to target the fairly young. The huge, potential market for M&S might be the more working- and middle-aged crowd, who want decent clothing items but also want to feel they are buying a slightly higher level of quality.
Not just any acquisition
A full acquisition of M&S, the subject of considerable Qatari takeover talk back in 2013, would likely be beyond Sanpower’s means or wants. The UK company has a market capitalisation approaching $10 billion and is trading at a price-to-earnings ratio of around 15.8 times.
In comparison, the privately-held Chinese conglomerate controls multiple subsidiaries, and its total assets and annual gross sales stand at around Rmb100 billion ($15.23 billion), according to its website. That is a similar total to M&S’s annual sales.
However, Sanpower needn’t conduct an entire acquisition. A strategic purchase of perhaps 15% might cost it £1.1 billion to £1.2 billion, and would comfortably make it the largest owner of M&S shares (currently the biggest is Capital Research and Management Company, with a 3.7% stake, according to fund research company Morningstar).
That sort of stake would offer the two companies an alliance that might help M&S successfully penetrate China. If successful, Sanpower could potentially look to increase its ownership further in a few years, potentially to just under the 30% level that would require a mandatory takeover.
The company’s myriad interests and its acquisition of House of Fraser make such an acquisition a big mouthful. Yet China’s consumer sector is growing apace, and if, as Yuan thinks, British brands offer traction, his company could do worse than associating with one of the most British of all.
What if… is a column that analyses unusual M&A ideas in Asia. These deals might not take place, but perhaps they should.
