Crunch time arrives for Forte

THE INVESTMENT COLUMN
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Hamleys is a name to conjure with, and not only if you are a child gazing in awe at the toys on display at the famous Regent Street store. Placed at 185p in May 1994, the shares have outperformed the rest of the market by over 60 per cent, even after yesterday's 3p fall to 335p.

The price dip came in the wake of news that underlying sales in most of Hamleys' stores registered a 5.9 per cent rise in sales in the five months to Christmas. That is less than the double-digit growth recorded by some high street retailers recently, but it is highly respectable none the less.

Christmas is obviously crucial for a gift-orientated retailer like Hamleys. The group reckons to generate around a third of its sales between the English half-term at the end of October and Christmas Eve. As it turned out, the latest festive period was the third in a row in which it broke records.

The core Regent Street store, which still accounts for three-quarters of group sales, saw a 6.6 per cent rise in business. August to October traded ahead of the previous year and while November slipped a bit, December more than made up for it.

Elsewhere, the group's newer ventures continue to power ahead. Those trading under the Hamleys name were nearly 36 per cent up. Strong growth at Heathrow and Covent Garden and new shops at the Channel Tunnel and Schiphol airport offset lower revenues from British Airways, which gives presents to children on its flights. Hamleys also continues to expose the inadequacy of House of Fraser, where its House of Toys concession clocked up a 21 per cent like-for-like sales increase compared with little more than 2 per cent growth from the host store.

With group trading continuing to be strong into January, Hamleys looks easily capable of lifting profits by pounds 1m to pounds 6.2m in the 12 months to the end of this month. That makes the shares a strong hold on a forward p/e of 18.

It is crunch time for Forte shareholders, who must make up their minds by Tuesday whether to accept Granada's pounds 3.9bn bid for the hotels group. With only days to run, it is a close call and for once the 15 per cent of Forte's shares in private shareholders' hands might have an influence on the outcome.

In what has been a dramatic, highly personalised bid, the management records of both sides have been well-rehearsed. Forte shareholders are aware, and the chart below confirms the fact, that over the past five years their company has been a dismal performer compared with Gerry Robinson's Granada. But that is of little consequence now - looking forward they have to answer three questions.

What will happen to their Forte shares if the bid fails? Should they sell in the market? Or should they accept Granada's cash and paper and hold on?

Forte has attempted to pre-empt the first question by attempting to create a floor for its share price at 330p with the offer of a share buy-back. But this will only go ahead if it enhances earnings, so it is hardly a copper-bottomed promise and the shares are still likely to be valued on fundamentals. As a much more cyclical business now it has agreed to sell its restaurants operations, a small discount to the market on forecast earnings is reasonable - this implies a share price in the 300p to 320p range.

Is the bid a fair price? Yes, if not a knockout blow. At a 32 per cent premium to Forte's share price before the offer, it represents a prospective p/e ratio of 25 and as Granada's share price rises, so does the value of the offer.

At yesterday's close of 696p, almost back to its pre-bid level, Granada's share price values Forte at 388p, leaving the value of the 362p cash alternative well behind. The latter is no longer relevant with Forte's shares yesterday at 381.5p. The other full cash option, selling in the market, only makes sense if you believe either that the bid will fail or that Granada will not continue to be a good bet.

So the last question is the most important. How good an investment will Granada be? Probably a good one. The company has a plausible programme for extracting value from the Forte businesses it plans to keep. There is considerable scope to improve margins in its rental arm and substantial prospects for growth in its television operation.

With compound growth of 12 per cent-a-year in prospect, a market rating is not a demanding price to pay for a proven management team, and a demerger further down the track could release even more value. Accept the cash and shares offer and hold on.

Careful footwork at Tottenham

Investing in football clubs is rarely a guarantee of a steady ride but the trials and tribulations that have beset shareholders in Tottenham Hotspur since it came to the market have been enough to try the patience of the most equable investor.

Tottenham's shareholders, as well as their supporters, have suffered their fair share of shocks. Football Association fines, the sudden loss of Jurgen Klinsmann, the wrangling with Terry Venables - all have buffeted the share price.

But in recent months there has been relative calm. At last Alan Sugar, the chairman, appears to be getting the business as well as the team in order and the shares have responded. In September, when the annual results were announced, the shares stood at 167p. Yesterday they were up 5p at a new high of 254p on the back of half-year results that showed profits of pounds 2.33m, excluding player transfers, and an interim dividend payment of 1.5p per share.

Can the shares go higher still? On the downside there is the pounds 6m or so that may be needed to develop the North Stand to take capacity at White Hart Line up to around 37,000. Mr Sugar might decide he wants to cash in on part of his near-50 per cent investment. And the team manager, Gerry Francis, will almost certainly want to put his hand in the pot to sign new players.

Against that, the increased revenues from television, sponsorship deals and merchandising these days give football clubs a much larger potential for profits. In Tottenham's case merchandise sales, sponsorship and advertising represent 37 per cent of turnover.

Shareholders intending to buy into the stock probably need to tread as carefully as ever given its recent steady rise. On the other hand there is a growing feeling that the City is at last warming to the attractions of football clubs, viewing them more favourably as leisure businesses with real growth potential. Be warned, however, the shares are extremely illiquid.

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