Jeremy Warner's Outlook: Green to move in for kill at wounded M&S

Amid all the brouhaha over dealing in Marks & Spencer shares, people seem to have forgotten that Philip Green has yet to make a proper bid. The trading of insults and allegations has made excellent copy to fill the business pages as we enter the dog days of summer, but it is of no long-term significance at all unless it forces Philip Green into retreat or Stuart Rose to resign. In the cut and thrust of a takeover battle, these are, of course, big prizes, which is why the two sides are trawling the gutter for all it's worth.

Amid all the brouhaha over dealing in Marks & Spencer shares, people seem to have forgotten that Philip Green has yet to make a proper bid. The trading of insults and allegations has made excellent copy to fill the business pages as we enter the dog days of summer, but it is of no long-term significance at all unless it forces Philip Green into retreat or Stuart Rose to resign. In the cut and thrust of a takeover battle, these are, of course, big prizes, which is why the two sides are trawling the gutter for all it's worth.

If Mr Green can so discredit Stuart Rose that M&S is forced to sack him, then the game will be up for M&S, even at the derisory price of 370p a share which is Mr Green's best offer so far. M&S has pinned all its hopes for a swift turnaround on the appointment of the former Arcadia boss, and though many others could no doubt achieve the same thing, M&S would be in desperate straits if it had to dispense with the man so recently welcomed aboard as its champion. His arrival was greeted like that of the fifth cavalry. The defence is Mr Rose, and nothing else will do.

So far, the Green camp has done an excellent job in besmirching Mr Rose's reputation and casting doubt on his integrity. Mr Rose was unwise, to put it as its most charitable, to buy shares in M&S when he was being approached right, left and centre by those interested in making a private equity bid for the company.

As for Michael Spencer, chief executive of Icap, that was just plain stupid. To take such a big punt on M&S so soon after having lunch with Mr Rose is something Mr Spencer's lawyers would almost certainly have advised against had he chosen to consult them. It looks bad even if it isn't. Mr Green must sense the tide is turning in his favour, after nearly a month on the back foot. With Mr Rose's reputation soiled, now's the time for the knockout punch, some advisers will be saying. Bid £4 a share and the prize will be yours.

Yet there are just as many questions about share dealings by friends and associates of Mr Green as there are about Mr Rose. Richard Caring, a close confidant of Mr Green as well as a big supplier, and Tom Hunter, a business associate, both bought M&S shares in the run-up to Mr Green's declaration of intent. The Reuben brothers bought options.

Bizarrely, the Reubens have written to M&S to complain about the way their options trading came into the public domain, though you can readily understand why they are so upset. The public parading of so many friends and acquaintances of both Mr Green and Mr Rose dealing in and out of M&S has resulted in a full-scale insider dealing inquiry, and rightly or wrongly, the Reubens' names are in the frame. I've no doubt that if the Financial Services Authority chose to adopt the widest possible definition of market abuse, then many of these people would be in trouble.

None of them - presumably - would have been stupid enough to deal after being given a direct steer by Mr Green that he was about to bid, but all of them would have known or surmised that something was afoot. Why even the Business & City editor of The Independent knew that Mr Green was up to something, and though I am an admirer of Mr Green's determination and resourcefulness, I can assure you he wouldn't count me as a friend.

To outsiders, it looks too much like a group of already exceptionally wealthy people scratching each other's backs, sharing in a backdrop of privileged intelligence and knowledge that enables them to take one way bets on the stock market. Worse, there's the suspicion that this sort of thing goes on in most takeover situations.

Why would people already so wealthy take such risks? The answer is that they didn't get to be as rich as they are by hanging around on the sidelines, worrying about how things might look, and checking out with their lawyers what might be acceptable and what might not be. A money-making opportunity is for them there to be taken, provided it is not obviously illegal. As the Reubens have demonstrated with their naively worded letter of complaint, such people don't expect their dealings to become public knowledge.

At least one City house with vague knowledge of the situation that did take advice was counselled strongly against taking a position in the stock, even though it might have been technically legal. There's plainly a difference between knowing or suspecting someone is considering a bid and knowing or suspecting someone is intending to bid. Whether the FSA makes the same distinction remains to be seen.

Given the glacial pace at which the FSA operates, we are unlikely to know the answer for months, if not years. In the meantime, there's Mr Green's bid, or non-bid. Have the share dealing shenanigans strengthened his hand? Only marginally, is my view. As things stand the two sides are about equal on points in terms of trading insults and revelations. Mr Green, on the other hand, can be considered to have had the better game, in that he was always bound to have his integrity challenged. Few would have expected Mr Rose to fall into such an obvious honey trap. Yet it is unlikely of itself to dislodge him.

Mr Green has had his mooted 370p a share offer rejected by both the board and by many of M&S's larger shareholders, who have refused to help him secure the due diligence he needs to proceed at such a low price. Now, perhaps, is the time for Mr Green to give it his best shot.

Public interest test

Conventional wisdom is that Mr Green's M&S bid is highly unlikely to be referred to the Competition Commission. Having spoken to a number of Government sources, I'm not sure this is the correct analysis. Indeed, I'm beginning to think there's a quite high chance of a referral. This is not because of the market power Mr Green would gain by crunching together M&S with his existing high street presence of Bhs and Arcadia. Rather, it is because of the highly leveraged nature of the transaction.

The 20 per cent plus market share Mr Green would preside over if he acquired M&S is nothing to worry about. Clothes retailing is an intensely competitive market with low barriers to entry. If Mr Green attempted to use his market power to crunch the consumer or deprive him of choice, he'd soon be found out and suffer accordingly. As things stand, M&S is a miserable and poor value shopping experience. That's why it is in such trouble. Mr Green is unlikely to make things worse, and if he does, then someone else will simply move in to take his place. Nor is M&S any longer such a living national treasure that it should be afforded special protections. M&S has no more right to exist on the high street than anyone else.

Yet though market power may in this case not concern ministers and regulators unduly, the highly leveraged nature of the transaction most certainly will. With WH Smith, private equity has already been given an object lesson in the demands that pension funds can put on a company's assets. They are a form of corporate indebtedness that hitherto had not been fully appreciated by private equity. The Pensions Bill deliberately enhances these rights in the event of any corporate restructuring, which shows you the way the Government is thinking on these issues.

Another big outside call on company profits and assets is the Inland Revenue. Any transaction that substantially reduces the Treasury's tax take will be looked at with extreme suspicion. This one will. Debt servicing costs can be charged before tax. The effect of gearing up M&S will therefore be substantially to reduce the company's taxable profits. The Revenue would also lose the tax on dividends. To date, the Treasury has largely turned a blind eye to the tax implications of private equity. The sector has been thought too small to be bothered with. But the M&S bid takes it into a whole new ball game. M&S is too big a bite to ignore. M&S is also a substantial employer. If the workforce is substantially downsized to pay down debt, it will further damage tax revenues. Private equity is already mistrusted as short-termist, financial engineering by some ministers. The decision lies with the Office of Fair Trading. It can expect plenty of pressure to make M&S a test case.

jeremy.warner@independent.co.uk