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Rose may need to go early to sustain M&S share rally

Source: Reuters - Fri 18th Sep 2009

Marks & Spencer could face two years of management instability unless Executive Chairman Stuart Rose brings forward his plans to quit by July 2011 at the latest, threatening a rally in its shares.

Signs that the 125-year-old group is stepping up its search for a new chief executive have raised hopes among some investors that it is getting to grips with the uncertainty over management succession that has dogged it for the past 18 months.

But a clear favourite has yet to emerge and Rose's plan to stay on for a time as chairman could create tensions with the new CEO.

M&S, which also sells food and homewares, announced plans to in March 2008 to make Rose both chairman and CEO against corporate governance guidelines, drawing investors' wrath.

In July this year, Rose saw off a second rebellion in as many years, when 38 percent of investors called on the firm to appoint an independent chairman by July 2010.

But unless he agrees to leave early, it may not be until late 2011 that investors will know whether Britain's top clothing retailer has a management team that can work together.

"Frankly, it's a mess" said Pali International analyst Nick Bubb. "The idea that we're close to achieving some sort of stability seems very far-fetched."

One top-10 investor agreed. 

"Once you have got yourself into this tangle, there's no way out unless someone leaves" he said on condition of anonymity.

"It's a very difficult situation. They (M&S) don't want to lose him (Rose). But at the same time, the market is going to remain very suspicious about how hands off he's going to be."

M&S is pressing ahead with its plans to bring in a new CEO next year and analysts have welcomed reports that the firm is close to appointing headhunters to find the new choice.

"We believe news flow surrounding the replacement of Sir Stuart Rose could see previously disgruntled investors moving back into M&S" said S&P Equity Research analyst James Munro, raising his rating on M&S shares to "buy" from "sell".


Thanks to a consumer recovery and an improvement in the food business, M&S shares have outperformed the UK general retail index .FTASX 5370 by 19 percent over the past year. They trade at 15.3 times forecast earnings, above a sector average of 14.7, according to Reuters data.

But many feel that this does not factor in the risk that M&S's succession plan goes awry, and its recovery from recession is disrupted.

One danger is that investors are disappointed by the choice of new CEO.

M&S has said it would prefer to appoint an internal candidate and speculation has centred around finance director Ian Dyson, who is also leading the group's new "Doing the Right Thing" strategy, and head of food John Dixon, who was promoted to the main board last week. 

But there are doubts whether they have the experience and clout to run a major international retailer.

"My view is there's probably a stronger likelihood of an external appointment" said KBC Peel Hunt's John Stevenson. "You're going to need someone who's got quite a strong retail pedigree behind them."

There's little agreement, however, over who the external candidates might be, or whether they would be prepared to work through a potentially awkward transition with Rose as chairman.

Sainsbury boss Justin King was an early favourite, but has repeatedly said he has no plans to move.

Asda chief executive Andy Bond is also a strong contender because of his experience in both food and clothing, while Morrison's Marc Bolland, WH Smith's Kate Swann, HMV's Simon Fox, Mothercare's Ben Gordon have all been tipped as possibilities.

Another large investor, who declined to be named, thought M&S could work round any concerns the new CEO might have about Rose's continued involvement in the business - but it might require his early departure.

"Given the various issues the new CEO has to face - I don't think anyone underestimates Stuart's ego - it may not be unreasonable for the new chief executive to demand a cast-iron guarantee that Stuart respects his territory and can indeed even demand that Stuart's departure be expedited" he said.

M&S has said Rose would only be staying on to ensure a smooth transition and that he has not ruled out leaving earlier than July 2011.

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