Copyright: David Lawson- Property Week Nov 1999
Home pageDon't go on holiday. Don't turn off the mobile phone. In fact, don't blink. One moment's inattention could miss the latest twist in the most riveting docusoap of the decade.
To recap: the Retail Family became compulsive viewing when Big Mall and his gang declared war on The Street (high street, that is). Interest soared further when sweet aunty Asda shacked up with an alien called Wal-Mart from the planet US.
Hysteria reigned about who might be next for a rewrite. Safeway dumped one boss; Somerfield followed with another after being caught in an unfortunate liaison with back-street boy Kwik-Save. Even ratings-winners Milord Sainsbury and the Marks & Spencer twins were pelted by a hooting audience.
Then out of the shadows stepped the mysterious Knutsford Four......
Tune in for the next exciting instalment. Perhaps tomorrow - or because it takes more than a blink to get these words on paper, perhaps yesterday.
THE AUDIENCE
Getting property people to discuss the Knutsford Four and their role in Store Wars is no problem. Getting them on the record is another matter. Most are working for the big retailers or feverishly cooking up potential takeovers, and they don't want to make enemies in either camp.
Mike Ringer of Fraser Trust is out of this secretive loop nowadays but feels a weird sense of deja vue. Almost a decade ago he joined Dunn & Co, the bluest of high street bloods, to sort out its 180-strong portfolio. Within three years, they were all gone.
He found the company was owned by its pension fund and the stores run as an employment centre. 'It was an archaic structure which did not have profit top of the list,' says Ringer.
He sees similarities today, where some leading retailers stick to old ways and do not treat property as an asset that needs to be sweated. 'It may be a management rather than a property play but if new bosses sweep in, they will look for dramatic solutions,' he says.
Securitisation or sale-and-leasebacks could be on the cards, a view shared by Sutherlands City analyst Adrian Elwood. 'Sell-offs are being touted but will other companies want some of the stores?' he asked. Marks & Spencer makes locations by its very name, while some Kwik-Save and BhS outlets might be hard to swallow even for the new wave of value retailers like Peacock and Matalan.
Neil Mackiness of GVA Grimley sees an underlying flaw running through the whole sector. 'Retailing has never recovered from the recession and it is no surprise to see what is happening,' he says. Major chains have 'brilliant' portfolios and these could be a potent protection against the twin threat of Internet shopping and new competitors.
'The question is why they don't cash in this property,' he says. The Dream Team (aka the Knutsford Four), or one of the other secret players assessing portfolios, with their cash and lateral thinking could make the decision for them.
This very secrecy enables names like Helical Bar and Delancey to be tossed into the ring without any commitment on their part. Simon Frost at Miller Developments could be one of the first knocking on the door, as he has already gobbled up 47 Co-operative Retail Society stores and is hungry for more. The crucial factor is the ratio of leasehold to freeholds, he says. Miller was able to redevelop 36 stores and sell the others to Primark because it had a free hand.
Now read on.....
THE PLAYERS
Knutsford
The quartet may not have started the rumours that blue chip retailers faced takeover but merely teaming up in a tiny shell company called Knutsford shortened the odds that something will happen.
'A dream team,' is how one City analyst termed the link-up of property wizards Nick Leslau and Nigel Wray with retail specialists Archie Norman and Richer.
'A bloody nuisance,' said a leading real estate consultant. 'They have given away the secret. There were half a dozen teams out there offering solutions to retailers and vulture funds. Now the prices will be ramped up.'
The partners are staying off the record at least until the Knutsford EGM today. 'We can't do anything without its approval,' said one insider.
But they insist there was no dark plan hatched at that first breakfast conference in Richer's apartment. It was just a meeting of minds in the knowledge that retail genius Norman would be looking for new toys after selling Asda to Wal-Mart.
'We didn't have someone in mind to take over,' said the source. But he thanked everyone for coming up with a shopping list.
Marks & Spencer
From hero to zero is a harsh judgement on a firm that made almost 550m net profit last year. But that was less than half the previous 12 months and Britain's favourite retailer has entered what one analyst calls a 'black spiral'.
Property could play a key role in whether - and how - the firm survives. M&S is dedicated to freeholds, according to Marion Weatherhead, a partner at Gardiner & Theobald, in her revealing book Real Estate in Corporate Strategy a couple of years ago.
These protect the firm from market swings and prevent landlords cashing in when the firm believes its very presence in a centre has boosted values. But this policy also has a grave weakness: it could provide the ammunition for a predator.
'No-one knows how much M&S property is really worth,' says Adrian Elwood, an analyst with broker Sutherlands. But the betting is that it is worth more than the book value of less than 3bn in the annual accounts. Like so many retailers, M&S has never had a full external valuation. The property is listed at cost, less depreciation.
'Sears fell apart because Philip Green could recover his costs by selling businesses and still be left with huge profits from the undervalued property,' said one property company chief.
M&S appears to have admitted this weakness at last. Stewart Anderson will join from Legal & General to shake up asset management in the New Year and is expected to open the door to sale-and-leasebacks. Jones Lang LaSalle is selling the Gyle shopping centre in Edinburgh while Healey & Baker and CB Hillier Parker are working on other disposals.
'It remains to be seen whether this is too late,' said one City analyst. 'But at least a proper valuation might take place. This would show which stores are making enough money to pay a market rent. Until that happens, the firm cannot possibly tell its return on capital, and is vulnerable.'
Sainsbury
The blue-blooded store chain is seen as the most likely target for the Knutsford team, if only because Archie Norman is a food retailer. 'The boys could also raise a billion pounds tomorrow, which takes it beyond tiddlers like Somerfield,' said one City analyst.
The huge property portfolio, stretching to more than 20m sq ft, could prove a critical factor. Like most other retailers, it is carried at cost (less depreciation) with no external valuations to factor in market premiums. Even then, it is worth only 25% less than Sainsbury's market value.
'That sort of difference could melt away with a proper appraisal, making a break-up worth more than the shares,' says one City analyst.
The company is said to be seeking ways to 'sweat' its property assets and appointed agents to advise on sale-and-leasebacks or limited partnerships. Analysts point out that Tesco has stolen not just top place in the retailing league but swept far ahead in asset management through joint ventures such as its links with British Land.
Safeway
New chief executive Carlos Criado-Perez was expected to face a baptism by fire when he delivered his first interim results this week [THURS 25TH]. Part of the announcement was likely to be the former Wal-Mart executive's plans for preventing his former employer pushing the chain off the list of top UK players.
Property has taken a back seat this year, with the firm admitting that new store development has slowed and jobs cut in the development department. The sliding share price could bring the 10m sq ft portfolio firmly back into focus, however, as this is now worth more than the company's total market value.
Blackstone, the giant US vulture fund, is already rumoured to have sniffed. It will know that the tradition of valuation by cost rather than market value could hide a wealth of surplus value.
Somerfield
Somerfield turned from soaring recovery to sinking star within months of management admitting its takeover of Kwik-Save had gone disastrously wrong.
The group had grown from the ashes of the near-bankrupt Gateway chain to a market value of more than 2bn but sales dipped in the Wall-Mart inspired price war. It is now worth less than the property portfolio.
Instead of waiting for a predator, Somerfield has decided to do its own break-up, putting 140 large stores and 300 Kwik-Save shops up for grabs but analysts believe the firm could struggle to find buyers for many poorly located properties.
'It is ironic that this could be the firm which truly reflects the future of retailing if it concentrates on Internet sales backed up by small, local delivery centres,' said one property consultant.
Whether it has the time to develop this theme is another matter.
MFI
Chief executive John Hancock may not have the sexiest company in the sector but he is closest to analysts' hearts. He has shaken up the management, revalued the portfolio and is selling like mad. Ten parks recently went to MEPC. Frankly, he believes retailers do not need to own property. Before long, perhaps few of them will.