By Kristy Dorsey

Shares in Marks & Spencer closed at their highest in two and a half years yesterday following reports that the resurgent retailer is being eyed up as a possible takeover target.

A weekend report cited unnamed city sources saying US private equity group Apollo Global Management is “running the rule” over M&S, which less than two weeks ago issued its second profits upgrade in four months after years of declining fortunes. Apollo is said to consider the retailer’s share price to be unfairly discounted by the impact of Covid, and its online delivery venture with grocery giant Ocado to be similarly undervalued.

Susannah Streeter, senior investment analyst with Hargreaves Lansdown, noted that Apollo has flirted with other acquisitions in the UK grocery sector, having lost out in its quest for Asda before then retreating from initial advances for Morrisons.

“Given its thwarted attempts so far, there is growing expectation that the group may make an offer for [M&S], particularly given that food was such a star performer in the last set of results,” she said.

READ MORE: Marks & Spencer profit upgrade hints at long-awaited new dawn

“Apollo will be weighing up the future value of Marks & Spencer’s e-commerce tie-up with Ocado, and speculation that its success so far may lead the retailer to buy out Ocado’s 50 per cent share indicates the weight of expectation about its growth prospects.”

Shares in M&S have surged by more than 27% since the company released interim results earlier this month in which it boosted its full-year profit forecast by upwards of 40% to “in the region of £500 million”. While cautioning that challenges still remain, chief executive Steve Rowe said it was “clear” that underlying performance is improving.

Ms Streeter added that if M&S shares continue to climb, Apollo “may turn into more of a reluctant suitor”.

Apollo missed out last year on buying the UK’s third-largest grocer, Asda, which was taken over by private equity group TDR and the British billionaire Issa brothers in a £6.8 billion deal. Apollo subsequently held talks over joining a consortium bidding for Morrisons, the UK’s fourth-largest supermarket chain, which was eventually taken over by private equity group Clayton, Dubilier & Rice (CD&R).

READ MORE: Petrol station tycoons to take control of Asda in £6.8bn deal

"It does demonstrate how the UK is still near the top of private equity shopping lists, with valuations of UK listed companies dragged down while the economy continues to reverberate with problems caused by the pandemic and Brexit after-effects," Ms Streeter said.

Speaking earlier this month, Mr Rowe said M&S did not want to over-egg its progress “given the history” of the company. The 137-year-old group’s clothing business has been struggling since well before the pandemic, with sales falling for eight years amid a reputation for “frumpiness”.

However, the strength of its interim results gave rise to hopes that one of the most elusive recoveries in UK corporate history could at last be on the horizon. “The hard yards of driving long-term change are beginning to be borne out in our performance,” Mr Rowe declared.

He and M&S chairman Archie Norman have been overseeing a restructuring of the business to improve the quality and value of its clothing and food offering, while also downsizing its store estate and enhancing the online offering.

READ MORE: Supermarket bosses back improved £6.7bn takeover offer for Morrisons

The retailer sold more than two million pairs of women’s jeans during the six months to October 2 and saw a 50% increase in sales across its Goodmove activewear brand. High street sales of clothing and homeware fell by nearly 18%, but online sales increased by 61%.

However, it was food sales that powered performance in the first half of the financial year, driven by the tie-up with Ocado. M&S products accounted for approximately 29% of the Ocado basket during that period, lifting total M&S food sales by 10.4%.

Total revenues were 5% higher than in the same period two years earlier – before the pandemic shut down much of the M&S store estate – at £5.1bn. Pre-tax profits reached £187.3m, besting both last year’s loss of £87.6m and £158.8m of profit the year before that.

Shares in M&S closed yesterday’s trading 4.7p higher at 245.5p, their highest price since May 2019.