City shuns Green offer for Arcadia as too mean to succeed

Retail entrepreneur has made a fortune from buying assets on the cheap. Not this time

Philip Green, the retail entrepreneur who owns Bhs, yesterday insisted he could still win control of Arcadia, the high street fashion group, after his £720m offer received a cool response from shareholders.

The lukewarm reaction from institutions came a day after Mr Green's 365p per share offer was rejected by the Arcadia board which said it "undervalued the company" and "did not form an acceptable basis for further discussions".

But Mr Green remained undaunted and appeared to leave the door open for an increase in his offer, which helped pushed Arcadia's shares up 13 per cent to 340.25p.

"It's clear that a deal is possible," he said. "It all centres around the price. We'll either agree a price or we won't". He played down the prospect of a hostile bid battle saying: "There are no hostilities in either camp." Mr Green is now "considering his options" along with his financial adviser, Merrill Lynch.

The comments came as several of Arcadia' biggest shareholders indicated they would back the company. "Considering all that the management of Arcadia have done so far, the share price looks very cheap," said Dominic Byrne, investment analyst at Standard Life Investment Management, which holds an 8.2 per cent stake. "We are very supportive of the current management."

Another of Arcadia's major shareholders said it considered 365p "just an opening shot" that was "too low".

A third said: "I would have thought the Arcadia board is best placed to negotiate with Philip Green. Stuart Rose (Arcadia's chief executive) is sufficiently motivated to get a higher price (his share options would be worth £23m under the terms of the proposed deal) and he got a good price when he was at Argos (which was taken over in a bid battle by GUS). We feel 365p is not enough."

Mr Rose expressed concern about the possible disruption to the business in the run-up to the key Christmas selling season. But he believes Mr Green is serious and will return with an improved offer, possibly later this week.

Mr Green's offer highlights two key issues. The first is the continued speculation about the future of Arcadia, which was the subject of a failed takeover bid from the Icelandic retailer Baugur last year.

Baugur, which made an indicative offer of 280p-300p per share, still has a 20 per cent stake in Arcadia and has agreed to back Mr Green's bid. It is also keen to buy the "younger fashion" chains from Mr Green if the deal goes through. These are Top Shop, Top Man and Miss Selfridge. Mr Green would then run Arcadia's other formats, Dorothy Perkins, Burton Menswear and Wallis alongside Bhs.

The second issue is Mr Green's obvious hunger for another deal after his success with Bhs. Having failed to win control of Marks & Spencer nearly three years ago, Mr Green struck the deal of the century when he paid the retail group Storehouse £200m for Bhs. Having turned the once ailing stores around the business is now said to be worth close to £1bn. Only two months ago he was involved with talks regarding a possible merger between Bhs and Woolworths.

The colourful entrepreneur, who spent £5m on a toga party in Cyprus to celebrate his 50th birthday party earlier this year, is also seen as a possible backer of Terry Green, the former Bhs chief executive. Terry Green, who is no relation, has been linked with possible bids for several retailers including Mothercare and Brown & Jackson.

The City consensus yesterday was that Philip Green's offer was too low to win control. Nick Bubb, retail analyst at SG Securities, said: "The valuation of 365p is too low as the performance is still good. But I think this one will run and run. He (Mr Green) wouldn't have started this if he couldn't offer more. The market seems to think there is a fairly high probability that something will happen."

Matthew MacEachran, at Investec Henderson Crosthwaite, said: "Arcadia has a cracking management team and its performance has been very good. The debts are coming down and it is less operationally geared than before. Fair value should be about 400p per share and the two of them (Baugur and Mr Green) may be able to achieve that sort of take-out price."

Under the leadership of Mr Rose, Arcadia has enjoyed a dramatic turnaround after losing its way under his predecessor, John Hoerner. The shares have rallied from 38p when he joined in November 2000 to more than 400p in April.

Mr Rose achieved this feat by slimming the group down from 13 formats to just six, closing stores and taking a stricter approach to stock management. The company is now forecast to have net cash this year compared with debts of £250m two years ago. Its most recent figures in June showed that its like-for-like sales were up by 8 per cent on the same period last year. The company is expected to report profits of £97m for its last financial year, which ended in August.

However, its low stock market rating is a legacy of its chequered past. Under Sir Ralph Halpern the company was expanded in true 1980s style with one takeover deal after another. Mr Hoerner demerged the Debenhams department store chain but added to the size of the group when he acquired a number of womenswear formats such as Miss Selfridge, Wallis and Warehouse, from Mr Green.

For Mr Green's part, the Arcadia deal would enable him to take his retail empire to the next level. It would be financed by bank debt from HBOS with Mr Green providing the equity money from his own resources. As with the Bhs deal, this would leave him with 100 per cent of the company.

He denied yesterday that he would make major changes at Arcadia, leaving existing operational management in charge of the chain he chooses to keep.

He said his offer should be attractive to shareholders as it is in cash in a difficult stock market. He also took issue with commentators putting a 400p value on Arcadia.

"I haven't noticed all these people buying the stock between 260p and 300p for the last month," Mr Green said. "This share price has been at 400p once ... it's got a very poor track record."

One major hurdle Mr Green must overcome is a possible reluctance by City institutions to sell out to Mr Green after being criticised for selling both Sears and Bhs to him at knock-down prices.

He denied this was an issue yesterday though privately he must know it is. "My money should be the same as everybody else's. Sentiment shouldn't come into it."