Marks & Spencer Considering REIT to House £4 Billion Store Portfolio

The Times - February 23, 2006

The value of Marks & Spencer would soar to 580p a share if the retailer injected its estimated £4 billion property portfolio into a tax efficient real estate investment trust (Reit).

The prediction by Morgan Stanley Equity Research analysts would lift the fair value of M&S to 45 per cent more than the 400p hostile bid made by Philip Green in June 2004 and 15 per cent above the current M&S share price. The Treasury intends to introduce Reits in the UK next January, but details of the legislation are still being finalised. The current proposals insist that the ratio of taxable profits to interest must be more than 2.5 to 1 and that no shareholder is allowed to own more than 10 per cent of the Reit.

Morgan Stanley said it estimated that Marks & Spencer’s property had a market value of £4 billion, rising to £4.2 billion by the end of this year. Turning its estate into a Reit would make more transparent the market value of its assets and free up cash for M&S to invest in its core retail business or distribute to shareholders, according to Morgan Stanley.

That would enable investors to value M&S as a retail business and allow management to focus purely on the core retail operations. It would also give M&S shareholders a chance to buy shares in a newly created property company and receive dividends from a tax-free profit.

The 580p target price — 30p above Morgan Stanley’s current target — assumes M&S splits into an operating company worth 440p a share and a property company worth 140p a share. To reach a fair value of 440p a share for the M&S operating company, Morgan Stanley assumes that the property is sold and leased back to M&S at a price reflecting a 5.6 per cent rental yield, in line with a sale and leaseback by Debenhams. The cash would repay debt.

The property company valuation is based on a 20 per cent rise in the £3.3 billion valuation of M&S’s property since July 2004 and a further rise to £4.2 billion by the end of 2006. If M&S paid a conversion tax of 15 per cent on capital gains tax liabilities, the new property company would have an asset value of £3.9 billion. After £1.5 billion of debt, the property company’s equity value would be £2.5 billion or 140p a share.

Few big retailers still own extensive portfolios of property. Sphere: Related Content