No Pain, No Gain: Hot profits are a symptom of takeover fever
Saturday 26 February 2005
The No Pain, No Gain portfolio is enjoying a heady bout of takeover fever. In the past couple of months, two of its constituents have succumbed to friendly deals and at least two others have been the subject of bid rumours. I think, given the circumstances, I can be forgiven for wondering which will be the next to go.
The two in the hand are Burtonwood, which has fallen to the Wolverhampton & Dudley Breweries, and Merrydown, the cider and Shloer adult soft drink group, where unquoted SHS has delivered a £36.7m offer. Allied Domecq and Scottish & Newcastle are the two that have so far merely attracted takeover gossip. The Merrydown deal values the shares at 170p, against the 35.5p portfolio-buying price. I suppose Merrydown's success is once again an example of patience being something of a virtue in the investment game.
I alighted on the shares in August 1999. I was impressed by new management which moved in as the group teetered on the brink of bankruptcy. Among those banking on a Merrydown comeback were brewer Shepherd Neame and the current bidder, SHS. They both took significant share stakes. Shepherd Neame eventually sold, barrelling a handsome profit. SHS went on to increase its shareholding.
The demise of Merrydown as a quoted company ends a rather romantic chapter in the history of the drinks industry, as well as the stock market. It was created just after the war by three former prisoners of war. They had perfected the art of fermenting cider and wine while they languished behind barbed wire. In its early days the business was famed for its exceedingly strong cider and a range of English fruit wines. On more than one occasion it went through the mill, before descending, rather disastrously, on a short-lived Australian alcopop, Two Dogs , in the 1990s. Perhaps it is fitting that SHS, which, among other lines, embraces the WKD range of alcopops, emerged as the bidder.
Talks took a long time to complete. They were first announced in November, reaching a conclusion , after other interested parties backed off, last week. In contrast, the Burtonwood deal was resolved in a few days, prompting suggestions that a higher price could have been obtained.
I opted to sell Burtonwood shares in the stock market, rather than wait for the offer to run its protracted course. In the case of Merrydown, I feel it is worth hanging around until the takeover goes through. I do not think a counter-bid will materialise, although the possibility cannot be completely dismissed, as accepting shareholders account for only 32.6 per cent of the capital.
More importantly, Merrydown has attracted a cash-only bid, whereas the Burtonwood shot included a share option. For a time, the share alternative pushed Burtonwood shares 20p or so above the cash bid, presenting an opportunity that I felt too good to miss. My decision to follow the bid programme means Merrydown, currently 166p, will remain in the portfolio until the 170p offer goes through. I suspect it will take some months before we actually see the cash: nearly £24,000 against a £5,000 outlay.
Another portfolio constituent has provided a more sobering experience. Even so, Printing.com, the high-tech printer, still looks a sound investment and I am prepared to stick with the shares. They suffered a hiccup when the company produced a mixed trading statement indicating profits would be towards the lower end of stock market expectations. Researcher Hardman & Co cut its profit forecast for the current year from £1.62m to £1.5m, but is sticking with next year's prediction of £2.45m. The shares, recruited at 30.5p, are about 52p.
Although Merrydown will be a portfolio constituent for some time, I am aware of the need for more recruits. It was decided early on that 16 would be an ideal number; once Merrydown goes, membership will sink to 13. Should Andy Nash and Nigel Freer, who masterminded the Merrydown revival, seek fresh pastures to conquer, I could be tempted by their next ventures, providing they are quoted.
Following successful business talent often provides rewards. Bob Holt, the man behind Mears, one of my most successful investments, has, after an indifferent run, generated interest in another portfolio member, Wyatt, the on-line risk consutlancy. Clearly Messrs Nash and Freer are worth watching.
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