Fayeds seek to restore their image in City: House of Fraser float advanced

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The Independent Online
JUST before Christmas a group of retail analysts was taken to visit some prize House of Fraser department stores in Cardiff and Plymouth. They did not travel InterCity but flew instead in Ali Fayed's helicopter, loaned for the day, presumably to impress the City scribblers.

Whatever anybody might say about the Fayed brothers keeping their distance from the forthcoming House of Fraser flotation, they are (like their bankers) supremely interested in its outcome.

They intend to sell off the entire House of Fraser group apart from the flagship, Harrods. Some say they have to sell to appease the bankers, who last April agreed to a critical refinancing of the Egyptian brothers' debts.

The banks will expect to see the Fayeds' debts reduced by around pounds 500m, if all goes well. Some suspect that a deal of such magnitude was a precondition of last spring's refinancing.

The flotation process is now firmly under way and running smoothly. The pathfinder prospectus expected next month should be followed by the sale of all the shares in the House of Fraser stores group before Easter, slightly earlier than originally anticipated.

SG Warburg, the bank advising on the flotation, and Dewe Rogerson, the public relations firm working on it, have stressed that the new group will be completely distanced from the Fayeds.

It will have a full board - on which the Fayeds will not sit. The board will be chaired by Brian McGowan, formerly managing director of Williams Holdings. Mr McGowan, for his part, has promised that he will resign if he spots any sign of interference.

The reason for such strict assurances is obvious for anybody who has followed the Fayeds' history since they controversially snatched the group from under the nose of Tiny Rowland of Lonrho in 1985. The takeover touched off what was to be an eight-year battle with Mr Rowland - a feud that was finally brought to a conclusion just before Christmas when Mr Rowland and Mohamed Fayed embraced each other in the Food Halls at Harrods.

But the peace accord cannot erase the memory or findings of a 752-page Department of Trade and Industry report, commissioned after massive pressure from Mr Rowland. The report concluded that the Fayeds had 'dishonestly misrepresented their origins, their wealth, their business interests and their resources to the Secretary of State, the Office of Fair Trading, the press, the House of Fraser board, House of Fraser shareholders, and their own advisers' in the course of making the controversial acquisition.

Since then, they have fought back tirelessly. They have lunched and courted highly placed journalists and ceaselessly attacked those journalists who were critical of them - even accusing some of being in the pay of Lonrho.

They have wooed important politicians, including Lord McAlpine, the former Tory party treasurer. They have survived a House of Commons Select Committee investigation and pressure from bankers, as well as the potentially debilitating battle with Lonrho - in which the latter even hired a former House of Fraser finance director to spread damaging information about the group's financial status.

The Fayeds' role as vendors in the House of Fraser flotation is bound to remind some City investors of the flotation of Mirror Group Newspapers. That was the last time a large portion of a company was sold to investors by a vendor - the late Robert Maxwell - who had been heavily criticised in the past by DTI inspectors.

But the advisers also point out that, unlike Maxwell, who hung on to a majority shareholding in MGN after the flotation, the Fayeds are making a complete break with the new company. There will, they say, be a rigorous separation of the pension fund, and due diligence has uncovered no worrying relationships between the Fayeds' personal business interests and the retail group.

Advisers have hinted that there will be no mention of the Fayeds' problems with the DTI in the prospectus.

This, again, is reminiscent of the MGN flotation, when Samuel Montagu managed to exclude Maxwell's dealings with the DTI even though he kept a majority shareholding in Mirror Group. Warburg is, however, likely to include a reference to the ending of the Fayeds' legal battle with Mr Rowland and Lonrho, 'which cannot be anything other than helpful'.

Had Warburg not taken on the flotation for House of Fraser, there would have been other takers for the job - but at a price.

Another merchant banker in the City said: 'Obviously one would have to take a long look at the pension fund and make sure that it is properly funded, and that the assets are there.

'One would have to take a careful look at all contracts with companies related to the Fayeds to see whether there are any trading relationships with them or any business associates of theirs. We would also want to be pretty sure of the ongoing management. I suppose we'd feel pretty exposed, and Warburg must be feeling a bit twitchy - but, providing the fees were right, we would have gone ahead, too.'

As for the business itself, its recent performance has been patchy. In the three years to end-January 1993, pre-tax profits on turnover of around pounds 600m went from pounds 30.5m to pounds 18.4m and back up to pounds 32.8m.

However, advisers will focus on the most recent record of the management team under South African-born Andrew Jennings. Analysts expect profits of more than pounds 30m for the year to end-January 1994.

The latest figures will be included in next month's pathfinder prospectus.

Assuming profits of around pounds 30m, and the fact that the company's shares are likely to be rated at around 20 times earnings, Warburg will be aiming to value House of Fraser at about pounds 400m. There would be about pounds 100m of debt left in the company.

If the float succeeds, the Fayeds' chances of keeping their bankers happy will be greatly enhanced. As one banker said last week: 'I can see this float succeeding, and in two years' time the Fayeds will be very respectable again - with the ability to do deals and new acquisitions.

'It's quite amazing really.'

(Photographs omitted)