Sector de-rating has created
attractive valuations
􀀗 We believe M&A activity is likely to
climb – initially on a small scale; we
screen for potential LBO candidates
􀀗 We upgrade M&S from Neutral to
Overweight (target price lowered from
445p to 400p), and lower a number of
other target prices
The collapse of ratings, magnified in consumer-facing sectors
such as retail, offers exceptional value for predators – at least by
historical standards. In this report we attempt to assess the
sector from a predator’s perspective. The level of off-market
M&A activity, ie, among unlisted companies, actually remains
quite high. We expect trade acquisition activity in the UK retail
sector to accelerate through the remainder of 2008. An
increasing number of tigers will emerge from the jungle to
attack some vulnerable looking goats…
Retailers with strong balance sheets will clearly be best placed
to exploit this acquisition window. We expect this wave of trade
M&A to be supplemented by small and mid-size deals in the
private equity (PE) space – where, again, activity has not
entirely disappeared. Large-scale activity depends more
critically on banks regaining an appetite for lending.
PE fund-raising has continued on an epic scale, and these firms
will have to begin acquiring, if only to appease their investors.
A larger equity component seems a pre-requisite.
Two companies stand out as meeting the screening criteria
that we have applied: Next and Travis Perkins. We have
upgraded M&S from Neutral to Overweight on valuation
grounds and have made target price reductions to numerous
other stocks, typically driven by sector price declines, which
are summarised in the table on page 4.
Several other companies have the mixture of balance sheet
attributes and interest cover that would make an LBO approach
feasible – but only at a share price below the current valuation
(after allowing for a 30% bid premium). Another group of
small-cap stocks, characterised by significant management
shareholdings, work on less demanding criteria.

目录

Introduction 3
Investment strategy 4
Trade M&A 6
Private Equity 9
Screening the sector 12
Company reviews 21
Travis Perkins 22
Next 27
Marks & Spencer 29
Disclosure appendix 44
Disclaimer 47

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