Shares of the iconic retailer Marks and Spencer are one of the top risers today on the top share index on reports that a buy-out of the firm is in the works.

Thus, banks are said to be exploring different possible means to structure a leveraged buy-out of the company, according to a report published by Reuters last Friday, after the close of markets.

Ideally a "leveraged buy-out" transaction sees a company acquired mainly using its own free cash-flow to pay back the debt assigned to the operation, which in turn requires that the target company have high and stable margins. For some time now the economic situation has meant that such potential targets are far fewer and far between than used to be the case in the halcyon days before the current financial crisis.

As well, the desire or need of lenders to deleverage and de-risk their own balance sheets means that finding relatively "cheap" financing is considerably more difficult.

The sources cited by Reuters believe that approximately £4bn of leverage would be needed to undertake a buy-out, evenly split between loans and bonds.

Significantly, a £2bn loan would be the largest sponsor-backed western European leveraged loan since the £9bn pound loan backing KKR's buyout of Alliance Boots in 2008.

Nevertheless, investors in covered loan obligations (CLOs) may be keen to invest in M&S as the end of their reinvestment periods draw closer. As well, there is thought to be a lot of potential liquidity in the US 'looking for a home'. Furthermore, the high-yield bond market re-opened last week after a long lull, and is expected to remain open until the end of the year; so it would be a good time for M&S to issue notes.

Lastly, however, note must be made of how "inconsistent" Marks&Spencer has been over the years. Herein lies part of both the opportunity and the risk of a buy-out, comment analysts at Digital Look. If the acquirer is able to grow the company then the numbers may indeed "add-up", but if not ...

In particular, the changes in consumption patterns seen in the last few years as the crisis has progressively become worse may prove hard to manage.

At the time of writing Marks&Spencer has a market capitalization of £5.991bn and trades at just 0.5926 times its sales and a price-to-book ratio of 2.14, versus 0.58 sales and a price-to-book ratio of 1.799 for a peer such as Debenhams. Clothing Retailer Next, on the other hand, trades at 1.736 times its sales.

As of 12:21 shares of Mark&Spencer are rising by 3.3% to 373p. The first report on this speculation by a newswire came on August 24, from Bloomberg.

AB

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