The last roll of the dice in a Rank disaster

The takeover saga involving Rank Group is finally near an end – and has highlighted the need for a clearer set of rules
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The Independent Online

Rank Group, the self-proclaimed "best game in town" for bingo fans, has a rich history stretching back seven decades and involving operations from making photocopiers to producing films. The company, which owns the Mecca bingo halls and Grosvenor casinos, is now embroiled in a bizarre takeover saga that has echoes of the Carry On movies it produced from the 1950s. More charitably, one analyst invoked Jim Carrey's Lemony Snicket film when summing up the drama, saying the management had been hampered by "A Series of Unfortunate Events".

Rank was seemingly targeted by Guoco Group, an investment vehicle owned by the Malaysian tycoon Quek Leng Chan, earlier this year. Yet, the City has been left bemused by Guoco's tactics; investor enthusiasm to accept an offer that analysts believe undervalues Rank by more than a fifth; and the board's decision to change its recommendation four times.

This culminated last week with the departure of Rank's chief executive, Ian Burke, only for him to return to the job yesterday. John Beaumont, an analyst at Matrix, said the takeover saga had been "highly unusual" in the leisure sector, adding that the company's "sales team said they have never seen anything quite like it".

Guoco, which invests in property development as well as hospitality, financial services and leisure assets, first bought into Rank in 2008 as the company was beginning to overcome the effects of the smoking ban. At the same time the Malaysian gaming group Genting bought in, prompting rumours of potential takeover interest.

Yet, nothing emerged until two months ago when Guoco lifted its stake from 29 per cent to over 40 per cent, crossing the threshold that triggers a mandatory bid for the whole company under UK takeover rules. The deal to increase its holding came at 150p per share, a premium of just 0.8 per cent to the closing price that day. Guoco added that it would not be increasing that offer for the whole company. The lack of bid premium prompted the Rank board to recommend shareholders reject the bid. Market sources said the lack of a premium meant the offer had been "priced to fail". That Guoco was also vocal over wanting to keep Rank's public listing, strategy and management backed up the point.

Yet, to both the market's and Guoco's surprise, 15 per cent of shareholders accepted the offer. Rank believes many of those investors had seen the stock double since buying in around 2008 and as Genting was ready to sell, others followed.

"It is surprising, but then Rank's shares have performed very well in the past few years, after recovering from the introduction of the smoking ban," one market source said. The stock has risen from 50p in November 2008 to more than 150p this month.

Guoco had set a firm deadline of last Friday for acceptances, and Rank's board became increasingly worried that the Hong Kong group could cancel the public listing, leaving minority shareholders with hard-to-sell holdings. On 23 June, the directors switched their recommendation to accept Guoco's offer. It was here, according to Mr Beaumont, that the situation began to unravel.

Four days later came another shift, this time to a split recommendation after Guoco answered some of its concerns, but not enough to put the board's mind at rest. This caused Mr Burke and chief financial officer Paddy Gallagher to walk out. "There was no bust up, they are held in high regard," one source with knowledge of the situation said.

James Hollins, an analyst at Evolution Securities, said they believed the pair "felt their positions had become untenable, notably given there remains the risk that more than 75 per cent of shares may be in control of Guoco [by last Friday]".

Then yesterday, the company revealed that following assurances from Guoco, Mr Burke had returned as chief executive and would take on the additional role of chairman when the offer closes. Mr Beaumont said: "This suggests his concerns have been addressed." Rank also

announced another change in recommendation to reject, with Mr Burke saying that Rank was an "excellent business". "Now that certain risks and uncertainties have been removed, we do not believe that this is the right price at which to sell," he added.

Guoco had extended its offer to 15 July, after a change in Takeover Panel rules specifically for this situation, and introduced a new mechanism which addressed the concerns facing that offer. Rank said its shareholders "now have a genuine choice between the potential future benefits of holding their shares in a listed Rank, and the ability to receive 150p per share".

One senior source said: "The board has changed its recommendation four times. It wasn't because they had changed their minds, they were reacting to a change of circumstances."

Mr Beaumont, of Matrix, said: "There isn't really blame to be attributed here. It is more like that film A Series of Unfortunate Events. At any point you can understand why the board took the decisions they did."

Rank's prospects, beyond the corporate tussle, look solid. Mecca and Grosvenor, which make up over 80 per cent of profits, are both growing. The casino business is looking particular strong. "They will look to expand that business, there are strong growth prospects there," Mr Beaumont said. It also has a bingo business in Spain, which is struggling, as well as an online sports operation. He added: "Ian is the right man for the job. Rank has been doing well and operationally was well run."

Rank was founded in 1937 when Joseph Arthur Rank formed the Rank Organisation, bringing together Pinewood Studios, Denham Films and, later, Odeon cinemas. It then expanded into businesses from record shops to photocopying. The company has been in the leisure industry for decades but become fully focused on gaming four years ago.

Guoco has control, but there is still further drama to play out. It has about 80 per cent support for its offer, although one big institutional shareholder decided to withdraw its decision to sell last week. If it has over 75 per cent on the deadline of 15 July it will have to discuss how to proceed with the Financial Services Authority, possibly including divestments.

The whole process has put the Takeover Panel under the spotlight. Rank's chairman, Peter Johnson, has criticised the regulator in recent weeks, saying there should have been more transparency and information to help shareholders. "We could have been here two weeks ago, but because of the regulations, neither the panel nor Guoco were able to do what they needed to."

One source close to the process said: "Some have questioned whether the Panel could have been more flexible. But this has been an odd situation, and most of the criticism is taken with 20-20 hindsight," before adding: "No one has come out of this unscathed."

The wins and losses of a British leisure giant

1937 The Rank Organisation is formed by Joseph Arthur Rank, bringing together Pinewood Studios and Denham Films.

1939 The company expands to include Odeon cinemas, the Gaumont-British Picture Corporation as well as Elstree and Lime Grove studios.

1948 More than half of the 63 films made in the UK are produced by Rank companies.

1950s Rank invests in Top Rank Records and motels and takes a 37.5 per cent stake in the Southern Television Corporation.

1956 Seals joint venture with Haloid to create what is subsequently known as Rank Xerox (RX).

1961 Rank enters gaming market as it converts cinemas into bingo halls under Top Rank Social Clubs brand.

1972 Buys Butlins in a deal worth £43m.

1986 Takes over its first casino, which is in Great Yarmouth.

1990 Buys Mecca Leisure, merging it with Top Rank.

1997 Divests last of RX stake.

2000 Sells Pinewood and Odeon.

2003 Buys gambling company Blue Square.

2007 Sells Hard Rock, which it had owned since the 1990s.