Vericool Finance

No we know things are serious. Forget Lehman Brothers, Woolies has bitten the dust. Most people saw it coming: Woolworths has been struggling for years – decades in fact. It finally hit a brick wall, in what should have been one of the busiest weeks of the year, when suppliers abruptly refused to deliver stock even as creditors demanded immediate payment.

Even so, many Britons will mourn its passing. Woolies has been operating in Britain ever since 1909 when the US nickel and dime king, Frank Winfield Woolworth, spotted an opportunity to introduce a budget store. Its vinyl singles and pick’n'mix counter are the stuff of everyone’s fond childhood memory. Sadly, however, nostalgia does not fill the tills.

Woolies isn’t dead yet. The administrators, Deloitte, claim there has been interest from ten serious buyers – including Theo Paphitis, the high street turnaround expert of Dragon’s Den fame. Moreover, parts of the business, including its distribution arm, EUK, and a joint venture with the BBC are still going strong. Even so, it will take a miracle to resurrect a store group deserted by even its core sink-estate customers, and the matter of some £385m in debt cannot be dismissed lightly either.

The writing was on the wall for Woolies in 2001 when the group was de-merged from its Kingfisher parent by Geoff Mulcahy, who flogged off its freeholds and saddled it with ruinously expensive long-term leases.

This collapse was as much about financial fads as retail fads. It’s a prime example of what happens when shopkeepers start viewing financial engineering as the best means of maximising returns. And that bodes ominously for the many other retailers enmeshed in an equally terrible tangle of lending. Corporate undertakers say they are already swamped: it will be a good deal worse after Christmas.

But the demise of Woolworths isn’t a tragedy – unless you work there. On the contrary, the essence of retailing, and of brands, is chop and change. One of the reasons for boom and bust, however distressing, is the need for a simple cull. Unless the merchants of plastic tat feel pain, there is never a spur to go one better with something fresh and innovative.

The decline and fall of Woolworths, then, is a cause for modest celebration – as well as gloom.

Elements of the Labour Party have been doing their damnedest to push back and defeat the onward march of private equity funds buying up UK companies, but one man may have struck the greatest blow. Step forward Lord Sainsbury of Turville, the former science minister whose eleventh hour intervention in defence of his family firm appears to have been decisive.

The Sainsbury clan controls just 18% of the company shares – not enough to derail the bidding consortium led by CVC. But Lord Sainsbury’s refusal to countenance any offer lower than £6 a share has garnered support from other shareholders and, like so many rats abandoning ship, the consortium has baled out, leaving the CVC to fight on alone.

It’s never over till it’s over, but it’s hard to see how CVC can successfully steer the ship into harbour by the agreed deadline.

David Sainsbury should be ashamed of himself. In determining the fate of the £11bn offer, he denied investors and employees the proceeds of a buyout. As a source in the CVC camp sums up, “the Sainsbury’s board is happy, but they cannot persuade His Stiffness”.

This bid promised to open a debate about the role of private equity in British business; it has wound up re-igniting a discussion about the place of founding families.

It would require a heroic extrapolation of the figures to argue against the bid on valuation grounds. By almost any traditional ratio, the latest 572p/share offer looks generous. But Lord Sainsbury’s view is that, after a decade in the wilderness, the company is setting out on a long haul back to former glory, so why cash out now?

Sainsbury’s is not in need of surgery… there is no problem that needs a private equity solution. In misjudging the situation so badly, four of the biggest names in private equity have scored an almighty own-goal. The shock of seeing a band of unknown financiers take aim at one of Britain’s best-loved brands was the trigger for intense public scrutiny, opening the eyes of British companies to private equity’s methods.

The question most likely to be raised in the future is “what can they do, that we can’t?” with the upshot that exploiting undervalued companies will become much harder.

Private equity has done everyone a service – the financial market is much better informed about what is at stake. But this ill-fated bid may turn out to be the high-water mark for leveraged buyouts in Britain.

Until recently, everything seemed to be going swimmingly for the lobbyists masterminding private equity’s campaign to present a more positive image to the British public. A new voluntary code on disclosure was in place, Government had reined in critical ministers, and the brouhaha surrounding the proposed Sainsbury’s buyout had faded.

Then Kohlberg Kravis Roberts – a leading member of the consortium stalking Sainsbury – invited the antagonists to put their gloves back on, announcing a £10bn bid for another high street icon, Alliance Boots.

Given Boots’ entrenched position in the UK pharmacy market, this bid is politically sensitive. Chairman Sir Nigel Rudd turned it down, but everyone expects KKR to return with a higher offer.

The odds of success are higher than at Sainsbury’s, not least because deputy chairman Stefano Pessina – the Italian “silver fox” billionaire who built up Alliance UniChem and negotiated its 2006 merger with Boots – is the prime mover behind KKR’s approach. Pessina is frustrated that the financial markets have undervalued Boots and argues he can pursue growth plans more efficiently if the company is taken private.

Yet there’s a whiff of a cosy stitch-up. The fact Pessina wants to work with the existing management team throws up an obvious conflict of interest. He can already count on the support of at least one board director, namely his girlfriend Ornella Barra.

Few expected this outcome when Alliance UniChem and Boots merged, but in some ways shareholders should be profoundly grateful to Pessina – At least he has highlighted the company’s potential worth.

Still, it’s obvious what he’s planning: he’ll increase Boots’ relative small debt and milk the company for all the cash it has. If Boots is to be sold, the fairest course would be to hold a public auction, but the likelihood is that a slightly higher offer of around £10.60 per share will do the trick: it would be a face-saving measure for the Boots’ board and a tempting prospect for increasingly short-termist investors.

It won’t do much to allay the fears of either Boots employees of the wider public, but it should act as a wake-up call to supine public companies and the institutional investors who should be backing them. If PLCs were more efficient and entrepreneurial, and if shareholders were more vigilant, private equity would not be able to have such a field day.

When Tesco unveiled its giant £500m green scheme recently – hot on the heels of a similar initiative from Marks & Spencer – many detected a certain serendipity of timing.

Barely a day passes without another PR stunt from one supermarket or another to show how green, healthy and cuddly to suppliers they are. Anyone would think there was a competition review on.

In the event, it proved a supermarket sweep. The Competition Commission stressed that its latest report was only its “emerging thinking”, but the bookies can pay out now. After three inquiries into the supermarket industry in eight years, the score is about to be 3-0. There was nothing here to frighten Tesco or any other supermarket.

Call it a victory for common sense. Clearly, the Commission is not planning to join the absurd bandwagon of Tesco-bashers who cast the company as an evil empire. It has found no evidence that the planning system was used to gain competitive advantage, and dismissed J Sainsbury’s claim that Tesco plans to exploit its land bank to grow its market share from 31% today to 45%.

True, there remain concerns about the squeeze put on farmers and local competitors, but as a whole British consumers are well served by the supermarkets.

The trouble with this report however, is that it fails to address the main grumbles about broader supermarket behaviour: the damage done to local communities, the environment, and so on. It is this “not our problem, guv” attitude that is so frustrating.

On the green issue, at least, the supermarkets deserve applause – even though their main motive in tapping the green pound is naked self-interest. Still, if they direct their immense buying power to bringing green consumerism to the mainstream, it will truly be a force for good.

It’s an astonishing, wonderful conversion, though some of Sir Terry Leahy’s bold commitments are riddled with contradictions and evasions. But there’s a bigger contradiction that has been overlooked. Leahy tells us Tesco is looking to drive a mass movement in green consumption, but what about consuming less? Less is the one thing the supermarkets cannot sell us and, as efficiencies become harder to extract, their growth will eventually outstrip all their reductions in energy use.

We should be glad the big retailers are competing to convince us they are greener than their rivals, but we still need alternatives.