Marks & Spencer - Takeover target or just banks fishing for business?

The Marks & Spencer share price has been up today on talk of the company being a takeover target.  My attention was drawn to it in the ADVFN morning market report because something didn't quite sit right with the story.

Here's what ADVFN reported;

"M&S was a high riser on the FTSE 100 after the Sunday Telegraph reported that the High Street giant is the subject of takeover talks. The paper said that bankers at a number of London institutions have assessed the possibility of providing debt finance for a speculative bid of £6bn."

Further investigation at the Telegraph's website added a little more.

"Bankers at a number of London institutions are looking at Marks & Spencer as a potential £6bn bid target as the retailer’s shares have slipped almost 50pc since highs in late 2007.

The Sunday Telegraph understands that bankers at institutions thought to include Bank of America Merrill Lynch have in recent weeks assessed the possibility of providing debt finance for a speculative bid.

Although it is understood neither bank has been mandated to pursue a specific course of action, the fact that they are looking at the retailer indicates the company’s predicament. Marc Bolland, M&S’s chief executive, has been criticised amid falling sales, particularly in women's wear, and problems in the company’s supply chain."

http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/9452750/Banks-see-MandS-as-bid-target-after-shares-fall.html

So, it would appear that because the share price of one of the UK's best known High Street names has fallen so far since 2007, a couple of banks have taken it upon themselves to assess the possibility of providing debt financing to whoever might be out there that would like to bid for it.  In other words, there is no potential bidder right now for M&S, so let's try and create one.

Or is there?

"One senior source went one step further, however, indicating that a large private equity institution – its identity unknown – had been actively considering a public-to-private takeover of the retailer."

Can we think of any other big FTSE100 UK companies that are undervalued right now?  How about Tesco and Sainsbury? Their share price has lagged a long way behind the market for some time and if M&S is undervalued then surely the two big UK food retailers are as well?

The problem is that in the current financial environment, raising the type of money needed to buy an M&S with an "undervalued" market cap of £5.5 billion is probably a non starter.  Tesco is valued at £25.6 billion.  Sainsbury around £6 billion. Tesco is probably out of reach of any private buyer and they would need to have deep pockets for either M&S or Sainsbury.  The share price would probably go a lot higher if the rumour turned out to be fact.

Chances are that nothing will come of this, it's just another city rumour, but someone today probably made money trading the M&S long side.  However, what this does suggest is that at least one of the UK's best known names is undervalued and the share price is that way largely because the company is in an unloved sector, something I touched on before here and here.