Doubts on Vickers bid as Mayflower woos institutions

Mayflower, the automotive engineering group contemplating a pounds 1bn break-up bid for Vickers, the tanks to Rolls Royce cars group, yesterday began wooing support from City institutions. But, as Michael Harrison and Chris Godsmark report, doubts are growing about Mayflower's ability to finance an offer on its own.

John Simpson, chief executive of Mayflower, embarked on an intensive round of meetings with the group's main shareholders in search of backing for a bid which would nearly triple its size and leave it with potentially heavy borrowings.

Five institutions hold about 30 per cent of Mayflower's shares and their support will be crucial if a bid is to be launched. Mayflower, advised by BZW, is said to have been sizing Vickers up for two years and to have begun making serious bid preparations in the late summer.

Mayflower's biggest shareholders are Mercury Asset management with just under 10 per cent and Hill Samuel and Flemings Investment Management, each with about 7 per cent. Schroders could have a pivotal role to play as it holds 4 per cent of Mayflower and 20 per cent of Vickers.

Meanwhile, there were indications that Vickers, which is advised by Lazards, could mount a bid defence involving a cash hand-out to shareholders from the pounds 500m it hopes to raise by selling Rolls-Royce, a plan which was announced last week.

Clive Forestier-Walker of the brokers Charterhouse Tilney, cast doubt on whether Mayflower had the firepower to proceed without a partner. "It is a close run thing but I think they would need a bigger brother to do it," he said.

One potential partner is BMW, the German car maker which already owns Rover. City sources said yesterday that it was unlikely Mayflower would have made any move without consulting with BMW since it was a important supplier to Rover, and because BMW was supplying the engine for the new 12-cylinder Rolls Royce.

BMW also has a joint venture with the Rolls-Royce aero engine company which owns the rights to the Rolls Royce name used by Vickers.

Mr Forestier-Walker, who puts the break-up value of Vickers at pounds 920m, also questions whether the Rolls car division was what Mayflower is primarily interested in, suggesting its real targets are the Cosworth engineering and propulsion businesses.

Rolls is reckoned to be worth pounds 500m-pounds 600m. That is more than the stock market capitalisation of Mayflower. Brokers calculate that Mayflower, which is valued at pounds 477m, would need to launch a one-for-one rights issue to fund just the acquisition of the Cosworth and propulsion systems businesses, reckoned to be worth about pounds 390m.

But there would be a heavy goodwill write-off involved in buying Rolls, while the tanks business might be worth as little as pounds 70m once a bidder took into account the costs of closing production facilities as its Challenger tank orders run out.

The Vickers defence is likely to centre on the ability of Mayflower to fund a bid. Though Vickers has not ruled out using the Rolls-Royce sale proceeds to mount a huge share buyback, the proceeds are likely to be invested in the group's marine propulsion business and spent on small- scale acquisitions.