The bid for such a large, investment grade company by a thinly capitalised raider ? even one with £1bn of personal equity to contribute ? will prove a fascinating laboratory of techniques in the loan, equity, bond and property markets.
Although the bid was not official, M&S?s new chief executive Stuart Rose rejected the possible offer from Revival Acquisitions, Green?s bid vehicle.
M&S stated: ?The board considers that the proposal significantly undervalues the group and its prospects and therefore rejects the proposal.?
Green?s initial terms were a possible offer to existing shareholders of between 290p and 310p for an ordinary share in cash plus shares in Revival Acquisitions, up to a total of 25% of the new company.
Green has loan financing in place from five banks: Barclays, HBOS, Goldman Sachs, Merrill Lynch and Royal Bank of Scotland. He is providing £1.05bn of equity himself, while another £405m of equity will come from banks, leaving the debt financing to be around £7.5bn.
Bankers expect that this is only the beginning of negotiations between Green and M&S, but the consensus view is that two outcomes are most likely.
The first is that M&S will mount a successful defence by increasing its leverage, or selling or securitising assets, to return cash to shareholders. Bond specialists regard this as likely to reduce its ratings from A3/A to the triple-B band.
If Green wins, on the other hand, analysts believe the increased leverage would drive M&S?s ratings down into double-B territory.
The five banks that have structured the deal are refusing to divulge details of the financing, but bankers in the loan market are positive the debt will not resemble a traditional leveraged buy-out.
Syndicating debt for an LBO in the retail sector is difficult. ?Even with its iconic status, I don?t think M&S could raise more than £1.5bn of bank debt in an LBO-style financing,? said one head of leveraged capital markets in London.
Instead, bankers predict that Green will have to make sure the leverage used in the deal puts the UK retailer in the rating range of BB to BB+ ? higher than the typical LBO.
?You want to keep banks from being frightened, but have a margin that funds will like,? said a head of syndications in London.
He predicted there would be a bank tranche paying about 200bp over Libor, as well as other institutional tranches with wider pricing, more similar to the usual LBO spread of 275bp to 325bp. The whole deal would likely have LBO-style fees, he added.
Banks could be persuaded to accept this lower margin by reducing the quantity of term bank debt. This could be done by structuring some of the debt as a bridge to a property securitisation or high yield bond.
Bankers also predict that Green will spin off M&S?s financial services arm to reduce the company?s borrowings. The unit has £2.45bn of retail loans and made a profit of £50.6m in the year to April 3, 2004.
Some tranches may also be kept as bilateral loans from the lead banks ? a move more likely for Barclays, HBOS and RBS than the two investment banks.
Green?s buy-outs of Bhs and Arcadia, the UK department store chain and clothing retail group, were completed using bilateral facilities from HBOS.
Another head of leveraged loan syndications in London said he would structure such a deal with a £2bn high yield bond and then senior loans ? some unsecured and some secured on M&S property.
?Partial private? templates
For the equity portion of the bid, buy-out specialists say Green is likely to follow one of two models.
The first is that used by pub entrepreneur Hugh Osmond in 2002 for his failed attempt to take over pub and hotel chain Six Continents. For his bid, Osmond offered mainly equity in a new company, with a small cash component. However, shareholders argued that this offered them little chance of an exit and undervalued their holdings.
The more likely blueprint, equity bankers say, is that of Morgan Stanley in its successful bid for Canary Wharf Group, which was approved by shareholders last week. Here Morgan Stanley, using an acquisition vehicle called Songbird, offered shareholders a cash offer for some of their shares, plus a special class of new listed shares in Songbird.
A legal specialist in ?partial private? takeovers, however, said the problem with both structures was how to convince shareholders to take equity in a new venture and not cash out entirely.
?By offering investors equity, Green is effectively asking shareholders to back his new venture,? he said. ?Shareholders may be reluctant to take shares in what will presumably be an Aim-listed company.?
If Green is successful, it is unlikely he will list the new company on the main London stock exchange, due to the additional listing requirements and the extra time a listing would require, compared to the fast track process offered by Aim.
But many of M&S?s existing shareholders, which include index tracking funds, may be unwilling or unable to hold an Aim-listed stock.
This problem is not insurmountable, as Morgan Stanley was able to reach a solution for funds that allowed them to take all cash or a mixture of cash and new Aim-listed shares.
Green may be unwilling or unable, however, to compromise on the mix of cash and equity.
