No Pain, No Gain: Directors should pay for the privilege of buy-outs

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The Independent Online

Management buy-outs are still in fashion. With the stock market going nowhere, more and more directors, backed by those ubiquitous private equity funds, are plotting to take the companies that employ them into private ownership. Often they have to borrow up to the hilt to meet their share of the takeover bill. So you can bet your bottom dollar they are convinced they are onto a good thing.

Among those planning to depart are Yates, the bars chain, Paramount, a former No Pain, No Gain portfolio constituent, and Easyjet, the low-cost airline.

I have no objection to directors settling for a rather more comfortable life away from the harsh glare of publicity and the rigorous demands of the Stock Exchange as well as the clamour from shareholders. But I feel they should pay generously for the privilege. Too often, to an outside observer, buy-outs appear to be opportunistic and cheapskate affairs.

The Yates buy-out is the most advanced of the three. Like most high street drink chains it has had a difficult time. Profits collapsed but new management now seems to be turning the long-established group round. After suffering the acute pain of the downturn, shareholders should be able to look forward with cautious optimism to the potential upside.

But management is offering 140p a share which compares with more than 500p some years ago, when Yates was enjoying the high street drinks boom, and a 52-week low of 81.5p. Perhaps then a not too unreasonable price if judged solely on the past year's share performance. But many investors take a longer-term view. On my calculations, allowing for one-off losses on properties sold (or earmarked for disposal), the terms are far from generous. And the managers and their backers, the GI Partners private equity group, would be foolish to overpay. So is 140p a fair price? I think not and shareholders should resist.

Paramount is an old pubs chain that was cleaned up to become a cash shell. Rather surprisingly it opted to take over a quoted company, offering cash and shares, instead of adopting the traditional shell policy of providing a quick route to the stock market for a private company.

Its target was the Chez Gerard restaurants. New management was drafted in and has revitalised an ailing business. Shareholders, who are offered vouchers that can knock £200 a year off their restaurant bills could, they must have thought, tuck in and eventually reap the benefits of Paramount's acquired success.

But no. Paramount's new management is talking of bidding 35p a share for full control. Again not too bad a price compared with recent displays. But the shares have been higher and after suffering the blows of the pub exit and the restructuring I suspect most long-term shareholders were content with their lot. It has been put around that over the next few years, as Paramount continues to develop its restaurant operations, shareholders are in for a rather lean time. So, no doubt out of the kindness of their collective hearts, the directors are prepared to take on the burden.

The Paramount management has yet to submit a formal offer. Certainly 35p is too low. If it must bid at such a ridiculous price it should provide a facility for those who want to stay on the shareholder register.

As for Easyjet, its founder and major shareholder Stelios Haji-Ioannou, has confirmed he is pondering withdrawing the group from the stock market and into his private ownership. If he does then I hope the price is seen to be right.

Finally, another former constituent - Safeway. I was not surprised by last week's profits warning from William Morrison. I felt it had taken on more than it could chew when it acquired, admittedly at a knockdown price, the Safeway chain. Although I was most unhappy with the terms I was clearly right to sell the shares and lock in a modest profit. In a takeover, uninfluenced by political prejudices, the winning bidder would have had to pay much more for Safeway.

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