Icelandic saga never quite had the ring of truth

WELL, it would have been jolly cheering for Stuart Rose. He has been chief executive at Arcadia - the Top Shop, Dorothy Perkins and Miss Selfridge group - for scarcely more than a year.

Yet had a suggested 300p-a-share bid from Bauger of Iceland come off, the dapper Rose would have been able to depart with about £18 million from share options.

Rose, a terribly personable man with good taste in suits, has made a habit of walking away from jobs with a decent sum of money tucked into the pocket of his well-tailored trousers.

He had a short but lucrative spell at Argos while he tried unsuccessfully to fend off GUS. He spent time at Booker nursing it back to some sort of health before it was merged with Iceland. In both cases, he was wellrewarded.

And he had the good fortune to join Arcadia in the autumn of 2000 when it was just beginning to recover from an abysmal year. The shares have more than quadrupled. Whatever happens to Arcadia, Stuart Rose won't starve.

But should we ever have taken seriously the idea that he might profit from a takeover of Arcadia by Bauger, which last year built up a stake in the UK group and subsequently signalled its intention to bid?

Remember two things. Nobody would deny Arcadia's performance has improved. Indeed, underlying sales in the four months to early January rose by almost 10%.

But the truth is that it hasn't been hard over the past six months for any clothes retailer to draw in the punters. After a rotten spell, the clothing market has improved. Fashion is back in fashion.

Second, Arcadia owns the freeholds on few of its 1,300 outlets. Yes, it owns a splendid property on Oxford Street in central London, which would bring in a serious amount of money were it to be sold.

But on the whole, Arcadia rents its shops. It has to make enough money to cover the rents before it can show a penny profit.

The significance of this is twofold. First, it means the company has far fewer physical assets than other retailers boasting sales of £2 billion a year. And second, it means that the operational gearing - the difference that a relatively small change in sales or margins has on the bottom line - is high.

When things are going well, that's great: profits increase sharply. When they are going badly, the profits can shrink alarmingly. And that, surely, is why the idea of a bid from the plucky Icelanders always looked like something of a long shot.

Bauger has made no secret of the fact that it would have to borrow most of the money it needed for a bid. And banks can get very twitchy when they are asked to back takeovers of companies that (a) have few assets and (b) have a volatile earnings stream.

On Friday, Arcadia told Bauger that the Icelanders had had all the information that they needed for a bid. They had been allowed to do all the due diligence that even the most neurotic and nervous could possibly want. Yet they still hadn't managed to get their financing in place. So Arcadia was calling off talks. Certainly, the Icelanders are welcome to come back if and when they have something concrete to offer. But in the meantime, Arcadia's management will get on with running the business, thank you (or whatever one says in Icelandic).

A wise move. Dealing with a bid is timeconsuming, but at least there are deadlines that everyone understands. Dealing with notional bid 'approaches' is hardly less timeconsuming, and they can drag on for an eternity. No wonder Arcadia's patience ran out.

The end of UK's spending spree
A FORTNIGHT can make a big difference. Back in the winter wastes of mid-January, respectable opinion predicted a fresh round of interest rate cuts to pep up economic recovery.

America's Federal Reserve would cut from 1.75% to 1.5%. The Bank of England would go down from four% to 3.75% at its meeting this Wednesday and Thursday. As for the European Central Bank - also meeting this week - we were told that the eurozone rate, now 3.25%, would fall to about 2.5% by summer.

Last week, the Fed did not cut. Few expect any change this week in London. Ditto Frankfurt.

It now appears the patient is in ruder health than was thought. US consumer confidence is on the mend, and figures on Friday showed American manufacturing output has stabilised. The worst may be over for the eurozone.

As for Britain, last week's purchasing managers' index showed some improvement for manufacturers. Meanwhile, UK consumers have never really been sickly. Quite the reverse: they have been taking full advantage of the doctor's note pressed on them by the Bank's Monetary Policy Committee to spend, spend, spend.

That period of indulgence may now be ending.