Matalan's founder suffers a familiar falling out of love with listed sector

'We are in for fun and games. The ground is being prepared for a less than generous offer'
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The Independent Online

Here's a question for a City pub quiz: what connects the fashion retailers Monsoon and New Look, the discount sofa chain DFS, Virgin Group, the computer hardware re-seller Computacenter, the software group Misys and latterly the discount retailer Matalan?

Students of City history will know that the entrepreneurs who founded and floated them - Peter Simon, Tom Singh, Lord Kirkham, Sir Richard Branson, Mike Norris, Kevin Lomax and John Hargreaves - all later tried (not on every occasion successfully) to buy back their companies.

Matalan joined that select club only on Friday, when it revealed that its executive chairman and founder John Hargreaves is trying to put a bid together for the 47 per cent of the company's shares that he and his family do not already own.

A tersely worded statement to the London Stock Exchange confirmed an open secret among the City's retail experts: Mr Hargreaves had been trying either to sell the company or raise the cash to take it private.

With no trade buyer willing to put Matalan in its shopping trolley, its chairman is trying to secure backing from Barclays Capital, Barclays' investment bank, for a bid of his own worth about £800m.

The genesis and anatomy of Matalan's present situation is in many ways an archetype for other public-to-private candidates. Fodder for management buyouts are often former darlings of the stock market, lately fallen on hard times.

Matalan was once feted as nothing less than the catalyst that would revolutionise the country's shopping habits, the company that invented the discount clothing sector. At its zenith, the out-of-town retailer commanded a market value of £3.5bn.

Sales, however, fell prey to biting competition from aggressive supermarkets that switched on to Matalan's success and simply expanded their own clothing ranges. Another rival, Primark, brought discount shopping to the high street.

Matalan has lurched from one sales disaster to another in recent years. In the year to February, pre-tax profits tumbled 30 per cent to £56.7m.

The decline in sales was mirrored by its sliding share price. In 2001, Matalan's shares boldly stood somewhere north of 550p. Yesterday, flattered by the prospect of a bid, they closed at 175p, valuing the company at just £717.6m.

Mr Hargreaves, like other entrepreneurs before him who took their highly successful companies public, saw his relationship with the City sour as trading dipped. He, like them, now complains that these outsiders (and they number fellow board members too) neither understand his business, nor are acting in its best long-term interest.

As one expert on retailers said: "The Matalan-Hargreaves example is a classic. Inevitably, if you start and build a company, then float, you find it hard to let go and to fit into the structures that public companies have to have. In your mind, it's still your company.

"Everything - from how you run a board meeting to corporate governance - is much more structured than in a private company, when you can run off in any direction. In a public company, you have to answer to other shareholders, who might not even understand the business.

"Your classic public company chief executive is excellent at managing audiences, is very controlled. Your average entrepreneur is more emotional, and less of a diplomatic or bureaucrat, which tends to make it harder for them to let managers manage."

In 1987, the young (and yet to be knighted) Richard Branson took Virgin private after little more than a year as a quoted company. He left behind a palpable impression that for all his apparent comfort with personal publicity, Britain's most famous businessman felt awkward with public scrutiny of his finances and of Virgin's bewilderingly compartmentalised corporate structure.

And if Mr Hargreaves' strategic response to troubled times is nothing new, neither is the tenor of the 62-year-old former street market trader's tactics.

Takeover offers from a company's top management often bear extra thorns to those from rival companies or private equity. Unspoken, but clearly present, is a threat to shareholders either to accept the bid or lose those running the business.

While the target company may have fallen on hard times, management upheaval and the resultant loss of years of experience generally is still to be avoided. In short, there is a point of view among many investors that Mr Hargreaves and his like have them over a barrel. A furious boardroom row has broken out, with Mr Hargreaves in effect holding Matalan to ransom.

The board's announcement last week is understood to have been drawn by a written threat from Mr Hargreaves to withdraw his family's support for the level of the dividend against the board's wishes.

His tactics echo those adopted by Peter Simon, the chairman and founder of Monsoon, who used his family's major shareholding to cut the dividend in the midst of a dispute with minority shareholders over his attempt to regain complete control of the company.

Mr Simon, who founded Monsoon more than three decades ago, twice failed to take the company private.

Mr Hargreaves thinks the Matalan dividend too generous for its profits and excessive when set against others in the sector. He told the board he planned to raise the matter at the company's annual meeting tomorrow.

That meeting is now likely to be as frosty as relations between the chairman and the rest of the board over recent months.

Mr Hargeaves still spends three to fours days a week at Matalan's headquarters in Skelmersdale in Lancashire. His son and daughter also work for the retailer.

Matalan's quest for a chief executive, its fourth since the company floated in 1998, has been frustrated by uncertainty surrounding Mr Hargreave's intentions.

Another criticism levelled at the Matalan founder (and other entrepreneurs who have made similar moves in the past), is that after enjoying all the benefits that public ownership brings to crystallise a large part of his stake, he is trying to buy back the businesses on the cheap.

Matalan, relatively speaking, is flat on its back. Some observers are suggesting that Mr Hargreaves could offer as little as 180p a share for the business. Hence, Matalan's shares made a rather muted response to the buyout possibility yesterday, rising just 6p to 175p.

Steve Davies, an analyst at Numis Securities, said: "It looks like we are set for some fun and games at Matalan. The comments on the dividend, and the implicit threat behind them, suggest that the ground is being prepared for a less than generous offer to shareholders."

That is also unlikely to much impress the rest of the Matalan board, which is being led by Geoff Brady, the deputy chairman and senior independent director, and Martin Reavley, another independent director.

They, and Matalan shareholders, should brace themselves for what threatens to become one of the most bitter boardroom battles since Lord Kirkham, the founder of DFS, took the furniture chain private 18 months ago.