Editor’s letter

At the end of May, a takeover bid by Philip Green put Marks & Spencer, a mainstay of the British high street, in ‘play’ – on the table as a takeover prospect. For the past seven years, Britain’s provider of sensible underwear has struggled on the stock market. Since a high of more than 660 pence a share in October 1997, three years later it was a quarter of that. And despite improvements, it has languished around the 300 mark since early 2003. This performance meant that back in late 1999 Green was already mulling a bid for the company but rumours of the company being a potential takeover target gradually simmered away. Then on May 27 those rumours were substantiated and the share price duly rose 21%.

After watching their investments perform poorly for seven years, shareholders were relieved that Green was finally going to realise some value for them. Not only would he buy the majority of the shares but the brilliant Green would no doubt turn M&S from provider of frocks for Henman-supporting housewives into the epitome of urban cool. However he has a much faster way of realising value for shareholders: the bonds.

On the same day that shareholders earned 21%, bondholders lost roughly 14%. And unlike shareholders, the bondholders have barely had to do any waiting: in the three months since M&S issued its 10-year bond, the price has fallen from just short of par to the mid- to low 80s.

Thanks to M&S’s refusal to provide covenants on any of its bonds, Green has a pot of around £800 million ready to subordinate to what is effectively private equity. So the question is who bought the 10-year bond back in March? Lipper eMaxx, a tracker of bond holdings, can only account for roughly £45 million of the £400 million total. Presumably, some of the remainder was bought by hedge funds, prop desks and other accounts looking to make fast profits off a new issue. With any luck they will have hedged the position with a little equity.