Argos bid in the balance

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ALTHOUGH its bid for Argos caught many by surprise, Great Universal Stores had been eyeing the troubled catalogue store retailer for almost a year.

Lord Wolfson of Sunningdale, GUS's chairman and an "Argos shopper on and off for a fair number of years", had felt for some time that the company needed a home shopping arm to boost its sales.

GUS's first approach to Argos a year ago, however, was met with a polite rejection from chief executive Mike Smith. GUS continued to research Argos throughout the year and decided in the autumn to wait for the company's Christmas trading statement.

That contained Argos's third profit warning in a year, and the announcement that the company was planning a mail-order service for later in the year, proved - Lord Wolfson said in an interview last Friday - that he was right.

He met the Argos chairman, Sir Richard Lloyd, on Wednesday and was told that Argos did not want to be part of GUS. An emergency meeting of GUS's board the following day led to the decision to launch a hostile bid - or "unilateral" one, as GUS prefers to call it.

Last Sunday, the two sides met at the offices of Argos's advisers Schroders, but GUS was unable to convince the Argos board to recommend a takeover at 570p a share, a 40 per cent premium to the Argos share price the previous Friday. GUS is confident that its pounds 1.6bn bid for the high-street catalogue retailer can succeed.

Lord Wolfson believes it will

be hard for Argos's directors to convince its shareholders they can increase the share price to more than the 570p that GUS is offering after three profit warnings in a year have cut the value of its shares by nearly 50 per cent.

In an interview on Friday, he expressed confidence that shareholders and Argos employees would welcome the takeover without the need for him to increase his bid, while a white knight riding to Argos's rescue with a counter bid looks increasingly unlikely.

Investors obviously believe his valuation is faulty. Since the bid, Argos shares have risen to 627p and some analysts believe the final price will have to be between 650p and 700p. Argos believes the shares are undervalued and does not accept the logic of Lord Wolfson's bid.

In its first defence, Argos dismissed the offer as an "opportunistic" move that failed to recognise the strategic value of Argos. It recommended shareholders to reject it. Argos also revealed that Mr Smith is too ill to continue in his job, a move that some observers interpret as an attempt to garner sympathy in the face of the bid.

The bid is the latest step in the 61-year-old Lord Wolfson's quest to reshape GUS for the new millennium. Even now, the names of its catalogues, Marshall Ward, Kays and Great Universal, conjure up images of rows of grey stone terraced houses nestled against windy, treeless hills.

After pre-tax profits fell last year for the first time in half a century, the catalogues that have clothed generations of families in the industrial north are no longer enough to see GUS through the next 50 years. Its traditional big book agency business is under threat from Next, Marks and Spencer, Burton and others targeting the lucrative home shopping market.

Lord Wolfson sees the key to growth in exploiting the access to information about shoppers that the catalogues can provide.

He has already lifted GUS's presence in the credit information business with the pounds 1bn acquisition in 1996 of Experian, a leading US credit data company. In the first half of the latest fiscal year, operating profits from credit services rose to pounds 66.5m from pounds 12.5m, while home shopping profits fell to pounds 51m from pounds 59m a year earlier. GUS added SG2, the credit unit of French bank Societe Generale SA for pounds 70m last week, extending its credit business in Europe.

Lord Wolfson is convinced of the fit with Argos. Although he wants the company, he says GUS does not need it. If the bid is rejected, or if a white knight should come along and whip the trophy out from under its nose, GUS would go on as it is, except of course with a lot of money on the bank to buy something else.

Whatever that may be, Lord Wolfson is certain that GUS will be a much more "user friendly" company in 10 years.

Copyright: IOS & Bloomberg