Accepting Rentokil offer is best BET

The Investment Column
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The Independent Online
Decision time is looming for shareholders in BET, the cleaning to plant hire group, who have until tomorrow to make up their minds about the pounds 2bn bid from Rentokil. Contrary to expectations earlier in the bid, the outcome is now an extremely close call.

BET has staged a remarkable come-back during the course of the battle, which most had assumed would be a walk-over for Rentokil. Perhaps sensitive to accusations of short-termism, many institutional shareholders have not been prepared to write-off the efforts of John Clark, the chief executive who arrived five years ago with a brief to turn around the disparate, heavily-indebted group.

Institutions holding over 17 per cent of its shares have publicly declared their support for the management, an impressive affirmation of their faith in BET, given that big shareholders normally keep their powder dry until the last moment in a bid.

Strategically, BET has a number of arguments supporting its claims to remain independent. Rentokil's growth record has been based on applying its management formula to a series of infill acquisitions for cash. Its only experience of a hostile bid was the takeover of Securiguard in a pounds 90m deal nearly three years ago. The addition of BET would triple the group's turnover, add 100,000 employees and raise the number of shares in issue by 43 per cent.

On top of that, Rentokil's claim that its businesses have a 75 per cent overlap with BET does not stand up to close scrutiny. It has no experience of plant hire and, on its own admission, the two transport businesses operate in different areas of the market.

The impression that the bidder is about to bite off more than it can chew was supported by the release yesterday of a piece of BET-sponsored academic research purporting to show that shares tend to underperform after large acquisitions of related businesses.

Perhaps the most telling weapon in BET's armoury is that Rentokil's offer is hardly a knock-out blow. The exit multiple would fall from over 19 times historic earnings to below 17, assuming BET's dividend forecast of 6.15p for the current year translates into earnings of 13p. That compares with over 20p for Rentokil.

But this is likely to prove academic. It is hard to argue with the impressive 14-year record of earnings growth of at least 20 per cent a year overseen by chief executive Clive Thompson at Rentokil. Scare stories of 900 per cent gearing at Rentokil post the bid are wide of the mark, given the group's prodigious cash generation.

By comparison, Mr Clark's record can charitably be described as pedestrian, reflected in the relative share price performance of the two groups. Accept the Rentokil offer.

Bank of Scotland fails to please

The Bank of Scotland tried to please yesterday with a 17.7 per cent rise in the full-year dividend, but the market was not impressed and dropped the shares a further 3 per cent to 251p.

Results for the year to end-February were respectable, with a 16-per- cent increase to pounds 484m in pre-tax profits excluding non-recurring items and the higher-than-expected rise in the payout was expected to be seen as an expression of confidence. But the market only had eyes for a strong rise in costs which, excluding the impact of the recent acquisition of Bank of Western Australia, increased by a little over 14 per cent.

Operating profits before bad-debt provisions only managed a 5-per-cent increase, leaving a productivity gap that had investors twitching. Peter Burt, who assumes the role of chief executive on 1 June, sought to allay fears, saying the rate of increase in costs is expected to slow during theyear, and the bank does not expect its cost/income ratio to rise.

At 52 per cent, Bank of Scotland (BoS) has a cost/income ratio that the other established high-street banks can only envy from afar. NatWest, for instance, is aiming to get down to around 60 per cent by the end of the decade. On that score, the market's reaction yesterday seemed a little harsh, but there is considerable nervousness around about any business where costs are felt to be going in the wrong direction,

As one of British banking's relative small fry, along with Royal Bank of Scotland, the BoS remains a potential takeover target, and is therefore obliged to pursue a more aggressive growth strategy. That makes life more risky, but in the longer term the benefits could come through. With last year's bid fever having worn off, BoS shares have settled to a level now looking cheapish, trading at 9 times 1996 earnings, compared to a sector average of 10 times. The shares are certainly worth holding, but whether investors will want to buy depends largely on risk appetite, and whether one feels the economy is set to give the sector a smooth ride over the coming years. In that positive scenario, and taking Mr Burt's cost caution at face value, the earnings potential could be rewarding.

Tottenham

times it right

The timing of Alan Sugar's pounds 11m rights issue at Tottenham Hotspur is as deft as a Teddy Sheringham run into the penalty box. Football shares are flavour of the month in the City at the moment as investors wake up to the revenue-earning potential of big clubs, particularly from television rights. Tottenham shares have more than doubled since last autumn and rose another 14p to 324p yesterday.

Priced at 270p, the one for four rights issue is pitched at a decent discount. Mr Sugar is not taking up his rights and more than 2 million of his shares will be placed with institutions.

The new cash will fund a new stand and increase the ground capacity by 3,000 to 36,000. Other revenue streams also look strong. The club has 12,000 season-ticket holders which means the club gets paid in advance. It has also signed lucrative four-year sponsorship deals with Hewlett Packard and Pony. Merchandising revenue from new kits is also healthy.

But the real pot of gold that could send football club shares sky-high is television revenue. The BSkyB deal with the Premier League runs out at the end of next season and the new contract is likely to be far more lucrative. Add to this the prospect of European competitions and possibly pay-per-view television and football clubs profits will soar. Tottenham's decision to reduce the value of its players' in its balance sheet by pounds 6.8m will knock profits this year but investors should be looking further ahead than that. Take up the rights.

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