Hammerson merger makes sense

The Investment Column
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The Independent Online
The leaked merger talks between Hammerson and MEPC were a surprise, but they make sense for a number of reasons. An enlarged group would jump into the FTSE index, attracting tracker funds, provide some geographical diversity and give Hammerson the cash flow to fund its ambitious development programme. A bid would be a well-timed opportunistic attempt to take advantage of MEPC's perceived current difficulties.

MEPC's shares rose 7.5p to 485p yesterday as the market treated with a pinch of salt the official statement that discussions were over and focused on Hammerson's refusal to rule out a hostile bid for its larger rival.

Attempts can be expected from both sides to highlight differences over the next few weeks, but really there are remarkable similarities between the companies. Both expanded overseas in the hope of ironing out the property cycle at home. Both failed to do so and suffered in the industry slump that followed the late 1980s boom. Both have had a degree of success in digging themselves out of that self-inflicted hole.

The two companies are perceived in contrasting lights in the City, however, thanks to one fundamental difference. At MEPC, James Tuckey, who was instrumental in disastrous developments such as London's Alban Gate, is still in place. Hammerson has benefited from the appointment of former Greycoat man Ron Spinney.

Hammerson is the sector's delinquent son who has seen the light and mended his ways. Its decision to rein in its sprawling world-wide portfolio, while retaining some exposure to the troubled (but hopefully recovering) European markets, has been praised. It has also taken the current sector bull run by the horns and rolled out an ambitious expansion programme.

MEPC, by contrast, has proceeded with the caution of a company that burnt its shareholders' fingers so badly last time round that this time it is taking no chances. It has sold out of Europe, arguably at the wrong end of the cycle, and focused on the US retail market, where competition is stiff.

Selling smaller high-yielding buildings in favour of lower-yielding, but higher-growth, large properties is the right thing to do but it will hit income in the short term, leaving little scope to raise the dividend which has been pegged at 20p throughout the 1990s.

As this column pointed out after Hammerson's figures, the company is as well placed as any to benefit from the improvement in the property market, but its shares, at 431.5p, already factor in much of the good news.

MEPC, with its shares trading at about forecast net asset value for this September's year end, also looks fully valued with only fairly weak support from a gross yield of 5.1 per cent. While a bid remains a possibility, however, the shares are worth holding.

Liberty gets rid of another distraction

Liberty's decision to sell its half stake in the "no-brand" Muji stores to its Japanese joint-venture partner, Ryohin Keikaku, is hardly a surprise.

The new Liberty management team led by chairman Denis Cassidy and chief executive Ian Thomson has a stated strategy to concentrate on the group's flagship store in London's Regent Street as well its airport shops business.

The regional branches were closed last year while the board is dreaming up ways of expanding the Regent Street store by freeing up space currently occupied by wood-panelled corridors and dark, dusty rooms lined with Liberty family portraits.

Mr Thomson believes that there is an estimated 45,000 to 50,000 square feet of additional retail space that can be freed up.

There will be a little more as a result of the Muji deal because Liberty is reclaiming the main outlet in Great Marlborough Street, creating an additional 3,000 square feet for the Regent street store.

The pounds 1.25m price tag may not look much but it was probably the right time to sell.

Since it first started trading five or six years ago, Muji has only just started making profits, with a pre-exceptional figure of pounds 110,000 on sales of pounds 4m last year.

Last year's figure was turned into a pounds 116,000 loss after exceptional items such as the closure of the Glasgow branch.

Liberty shares have come off quite a bit since their 440p level at the beginning of the year and fell a further 2.5p to 367.5p yesterday.

With full-year results due later this month there are no forecasts available for what is a small company with a dominant 44 per cent stake held by the Stewart-Liberty company.

This may seem a deterrent, as might the company's exorbitant rating based on recovery prospects.

But the new management has delivered on its promises so far and Bryan Myerson, the South African rebel shareholder of UK Active Value fame, holds a 17 per cent stake and would like to buy the family out. Mr Myerson is supportive of the new management's strategy. Shareholders should do the same and hold on.

Capita tripped up by profit-takers

Capita, the management services group that has grown by snapping up outsourced contracts to administer pension funds or collect debts, and also operates the nursery vouchers scheme, had the dubious distinction of falling further in percentage terms than any other of the top 250 companies yesterday morning. By midday it had fallen 75p to 630p, and that on top of a 17.5p fall last Thursday.

It is tempting to see the slump as political, a response to the continuing failure of the Government to make any real progress in reducing the Labour party's mountainous lead in the opinion polls. But whatever backwoods investors might think, the City has long since convinced itself that a New Labour government will of necessity be as keen on cost saving as the Conservatives.

And as managing director Paul Pindar says, 38 per cent of the group's business is with local authorities, the vast majority of which are already Labour or Lib Dem controlled.

In any market shake-out, shares which have risen most become vulnerable to profit-taking. Capita shares had doubled between last October and the recent peak of 825p and were inevitably at risk when investors were looking to lock in profits in case of a substantial market correction.

In fact the steep fall in the shares during the morning was driven by a very low volume. The largest single transaction was 7,000 shares, which suggests that there was no institutional selling at all. The shares yield just 1 per cent, but the group is cash-rich and analysts are not changing their forecasts for the current year. If the UK follows the US, where 2.5 per cent of the labour force now works in call centres responding to customer enquiries, outsourcing has a long way to go.

That is the good news. The bad is that, down 58p on the day at 647p, the shares now trade on almost 40 times forecast earnings, which leaves little room for error.