This week: Tesco, Volex, e-Mezzanine

 

The stock market is confused and uncertain about where Tesco is heading. The biggest worry is that the super-market giant will be squeezed hard with the arrival of US retail giant Wal-Mart, which has taken over Asda and is 15 times bigger than Tesco. There is also the threat from the internet and a new breed of discounter selling clothes and other non-food items, undercutting established High Street giants.

So far Tesco chief executive Terry Leahy has fought off the challenges, but life is getting tougher for grocers, even Britain's biggest. Tesco has mapped out a strategy to expand into new markets in the Far East and eastern Europe, where consumers have only recently been introduced to the delights of attractive supermarkets stacked full of goodies. But the City has still to be convinced this will be enough to drive Tesco's share price much higher.

Wal-Mart's arrival has changed the nature of the UK's grocery trade forever and Tesco may be locked into a unwinnable war unless it merges with a similar group to give it more muscle and economy of scale. As it happens, there are fresh rumours that it may be dusting down plans for a merger with either Casino, one of France's biggest supermarket chains, or Ahold of the Netherlands.

Three years ago Casino and Tesco looked seriously at a merger. My man in the aisles says they went as far as to produce detailed documents code-named Town and Country - T for Tesco and C for, you guessed it. They also looked at taking over French chain DDF and carving up its assets between them.

In the event the talks fizzled out and Tesco subsequently sold all its interests in France. But there is nothing like adversity to knock heads together and, urged on by Tesco's financial adviser Morgan Stanley, an alliance may be back on the agenda.

Without a major deal, Tesco's shares, at 179p, are heading nowhere and might wobble on any bad news from the High Street. But a merger would give the Tesco trolley a strong push forward. Buying a share on merger hopes is always risky, but a Casino deal could be on the cards next year. Tuck away some shares just in case it happens.

Meanwhile….hold on to shares in Mezzanine, the wine bars and dance clubs company formerly known as Pembertons. For the past two years they have languished through lack of City interest, but I have urged investors to hang on. Now they stand to be richly rewarded for their patience. Last week Mezzanine announced the launch of a record label and its own internet music division under the direction of Andreas Georgiou. He was previously vice-president of pop star George Michael's record label and its website. Georgiou will lead Mezzanine's internet venture.

The move will force City investors to take a serious look at the group. Its internet presence is an attempt to capitalise on the popularity of its dance clubs. Music played by well-known DJs will not only be available on CDs, but could also be piped through the web to fans and Mezzanine's wine bars, giving the sites novel appeal.

Even without the internet potential, the shares look good value at 22 1/2p. With profits of about £1.5 million forecast for the year to March 2001, they are valued at just nine times expected earnings. A growth stock with added internet appeal could reasonably command a rating of 20 times profits, implying that the shares could head for 50p

….finally, David has indeed trounced Goliath in the stock market. Midas recommended electrical engineer Volex in May at a time when the City had little time for medium-sized companies. Blue-chips were all the rage, but we compared the potential of Volex with GEC, now Marconi, and concluded that tiny Volex would outperform its big counterpart in the industry. Marconi was then the darling of the stock market and Volex had precious few fans. But it has lived up to Midas's faith. Tipped at 474p, Volex has delivered a 100% total return, including dividends, to shareholders compared with Marconi's 50%. Once again it demonstrates how undiscovered but well-managed companies can often beat the market's stars and reward investors handsomely. Hold.

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