SBRY
MKS
Ignore unlikely merger talk between Sainsbury and Marks and Spencer
by John Marshall
An interview by Sainsbury (SBRY) chief executive Justin King in the Daily Telegraph has resurrected speculation of a merger with Marks & Spencer (MKS), where he was formerly head of food. Such a merger would have superficial attractions for both of the underperforming firms, but this tale lacks credibility and if the two stocks rise this looks to be a good selling opportunity.
Sainsbury, which is generating poorer sales growth than any of its competitors, has nowhere to go. There is no scope for acquisitions in the UK and any overseas venture would hit sentiment on the stock. The group also has a less developed non-food range than most of its peers.
Meanwhile, M&S’s food sales are in free fall. Nick Bubb of brokers Pali International believes next month’s trading statement will reveal a like-for-like drop in food sales of some 8%. In theory a merger might solve this problem by putting Sainsbury ranges into M&S stores. King noted in his interview that where Sainsbury stores are close to M&S outlets his sales are good. However, perceived value is the key and this is a test both seem to fail.
A second advantage for M&S is such a deal would solve its succession problem. Chief executive Stuart Rose is committed to staying until 2010 but would like to leave on a high. A merger is the nearest he is likely to get to that ambition.
A merger between these two underperforming retailers would be seen as essentially defensive. But Rose has personal experience of another defensive merger which failed, since he was one of those who presided over the creation of the Big Food Group by the merger of two unsuccessful businesses.
Both companies are due to update the market next month – M&S on 2 October and Sainsbury on 8 October . This may lead to further speculation providing an opportunity to lighten holdings.
Shares says: These rumours are an old chestnut and are not to be trusted.
Sell M&S and Sainsbury
The writer holds shares in M&S
