No Pain, No Gain: Dramatic recovery bodes well for Interserve

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Remember MacLellan? It was the support services group that graced the No Pain, No Gain portfolio before falling to a £116m takeover from much bigger rival, Interserve, in the summer of last year.

The bid was quite generous, pricing each share at 116p. Cash and shares were on the table and it seemed any investor who had followed the portfolio was on to a winner.

Then pandemonium. The valuation became something of an illusion. The bidder had used a mix-and-match facility allowing accepting shareholders to opt for either cash or shares. Unfortunately, so few wanted shares that the money element proved insufficient. So cash-hungry shareholders – including the portfolio – had to accept some shares, even if they had wanted an all-cash payment. For each share 80.6p in cash was received with the rest made up of Interserve shares, then priced at around 380p. Shareholders wanting money had to incur the cost of selling in the stock market. To get near the recommended price they had to be quick.

For soon after Interserve, which in addition to support services embraces such activities as building and civil engineering, paid out, its shares collapsed. Accounting irregularities were discovered and a results announcement postponed. It looked grim. The shares plummeted to 260p, leaving MacLellan shareholders that still had Interserve shares feeling short-changed.

Anyone with, say, 1,000 shares, was £115 out of pocket. Talk of legal action swirled around. Surely Interserve, it was argued, must have known of the accountancy problems before the offer closed. I suggested at the time that an honour payment should be made.

But Interserve said it was caught on the hop. It was as surprised as the rest of us. To add insult to injury, it seemed the shortfall was only discovered through the integration of MacLellan.

Well, my honour payment idea was not taken up. Indeed, the unexpected problems, which cost some £30m, were not as wounding as first feared. And with profits moving ahead the shares have since topped 500p, lifting the offer's value to, in effect, around 128p.

I am impressed by the group's dramatic recovery from last year's shenanigans. Recently reported half-year profits emerged at £28.2m against £23.1m and the year's outcome should be £65m. The portfolio has a vacancy and Interserve, the old Tilbury Douglas group dating back to the 19th century, could well be a candidate.

One constituent that could depart is Scottish & Newcastle. The signalled break-up strike from Carlsberg and Heineken could lead to the demise of Britain's last remaining major brewer.

Scottish is the longest-serving portfolio member. I recruited the shares at 394p in July 1999, largely in the belief that the group would eventually succumb to takeover action as the world drink behemoths consolidated. It has taken longer than I expected, but I must admit that now hostilities have actually commenced, I will be sad to see the group vandalised. After all, it is the last of a once powerful and proud breed that featured such beer giants as Bass and Whitbread. Government interference – and inconsistency – had much to do with the decline of a once great British industry that could have achieved a strong international role.

Whether Scottish will survive or fall to the Continental lager alliance – or another big player like SABMiller – remains to be seen. My own guess is that its days of independence are numbered. From an investment viewpoint the shares have been a good buy. For a long while they offered a 5 per cent-plus dividend yield and then a not inconsiderable 3.5 to 4 per cent.

Any take-out price should be at least 800p, perhaps quite a lot more. After all, in the final years of the last century, before established industries were supplanted in the stock market by the siren call of the new (and short-lived) economy of the internet, Scottish shares nudged 700p. I don't think they were then over priced.

Since then the group has become a major player in the former Soviet Union, the world's fastest growing beer market, and established itself in other growth areas. Maybe the big, transformational takeover eluded it, but there are still possible deals it could achieve and, in its own right, become a powerful influence on the world beer stage.

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