Fayeds set up pounds 40m indemnity for House of Fraser investors

THE Egyptian Fayed brothers, who are selling the House of Fraser department store group via a giant share flotation, have left a pounds 40m indemnity to cover the company against any liabilities over pounds 10m that may result from their past links.

The indemnity, which is supported by a bank letter of credit, covers the company against any such liabilities 'incurred by or with the approval or through the actions of' Mohammed Fayed or his brothers. It covers the company until 31 March 1995 and applies to liabilities other than those 'entered into in the ordinary course of business'.

The existence of the indemnity was disclosed in last week's pathfinder prospectus for the House of Fraser flotation, which has been accompanied by marketing and advertising hype rarely seen outside government privatisations.

Some of the anticipated pounds 400m to pounds 500m in proceeds will go to repay the banks that refinanced the Fayeds' debts last year. Under the current banking agreement, the Fayeds, who were criticised in a Department of Trade and Industry report, must steadily reduce their borrowings. A repayment of up to pounds 60m is expected by the end of April, followed by a payment of up to pounds 175m by the end of April 1995.

The prospectus also discloses that, though the company has been separated from the Fayeds' other interests in almost all respects, business links between the company and the Fayeds will continue after the flotation. For example, Genavco Insurance, a Harrods subsidiary owned by the Fayeds, will continue to provide insurance brokerage and advisory services to the group 'on an arm's length basis'.

Advisers to the float say the amounts involved will be small but investors who anticipated a complete break with the Fayeds may not have reckoned on the continuing association.

Brian McGowan, who said that he wanted to spend more time fishing when he retired from Williams Holdings last year, is being paid an annual salary of pounds 150,000 by House of Fraser to be its non-executive chairman. He is also being paid an undisclosed fee by Harrods Investments, a Fayed company, 'in consideration of his efforts with respect to the flotation of the company'.

Advisers say that this fee is a private matter between Mr McGowan and the Fayeds and that this view is backed up by three sets of lawyers. However, investors may have taken comfort from learning what the size of the fee was and whether there is any additional incentive for Mr McGowan to ensure that the share price remains strong further down the line.

In most respects, the pathfinder prospectus sent to the press and City institutions last week raised few eyebrows among potential investors. Mr McGowan is generally regarded highly in the City, as is the current management team led by managing director Andrew Jennings. Advisers say that a number of one-to-one presentations are being made to institutions and that so far these have gone well. Meetings have been held, it is believed, with Schroders, M&G, Hill Samuel, and the British Airways pension fund, among others. Unusually for a share issue of this size, only a quarter of the shares on offer are going to the public, and even this amount is subject to a clawback from the institutions.

House of Fraser's profits rose by 31 per cent from pounds 23.9m to pounds 34.5m in the year to January 29, with profits boosted through the combination of increased turnover and reduced costs. Many of the firm's full-time employees have been replaced by part-timers.

Analysts believe House of Fraser is looking at an offer price of between 180p and 220p per share, depending on the state of the stock market and the success of the extensive marketing campaign.

Tony Shiret, stores analyst at BZW, thinks the shares should be priced to trade ultimately at a discount to the sector to reflect his view that the company's prospects are less exciting than other store groups in the sector. 'A price between 180p and 190p would interest more people,' he says.

A price of 180p would raise just over pounds 400m. Given that the new group will retain around pounds 90m of borrowings, the net gain for the Fayeds will be around pounds 500m.

Even at that level, the Fayeds' bankers ought to be considerably happier than they have been for some time.

(Photograph omitted)

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