The value of rumours…

News that Sainsburys latest improvements in like-for-like sales may have prompted renewed attention from the Qataris, and possibly causing JS to re-consider a merger with M&S, raises the question of the value of rumours in supplier-retailer relationships…

Essentially, JS have undoubtely done a good job in improving like-for-likes by 6.5% and gained share from Waitrose, M&S and Tesco. However, this has been achieved at the expense of the bottom line. They need to improve Net Margin from its current 2.7% to something like double that figure in order to improve ROCE, and drive the share price to a level that will make them too expensive to buy, thereby giving them autonomy. Meanwhile, merging with a weakened M&S might be an option… (More)

Whilst the rumours are obviously distracting for the players concerned, such rumours can be valuable in forcing suppliers to seriously consider various 'what ifs', run the numbers and make decisions in advance of press announcements of a takeover that morning… Even if the rumours prove groundless, the exercise can help the company to re-consider its options, from a fresh perspective, and possible rationalise customer and product portfolios in the process, making for a better fit with market need…

Meanwhile, it is obvious that JS is undervalued in terms of market capitalisation (you could buy it for £6.5bn in the open market) so a merger with M&S is one way of delaying a full takeover by Qatari. This would mean gaining scale economies in private label food and some brands, but would entail coming to grips with the upper end of the rag-trade, where Stuart Rose has discovered, M&S shoppers' appetite for frocks is different…