Institutions hold the key to AAH

The Investment Column

AAH is a classic example of a conglomerate gone wrong. It entered the Nineties with a rag-bag of businesses ranging from building supplies to transport services, having finally exited from the last vestiges of its original solid fuel supplies operations.

More by a process of attrition than good management, pharmaceutical wholesaling and the chemists chain have emerged as the main money-spinners over the past five years. But even that has not been very successful, as the share price testifies. From a high of 597p in January 1993, the shares touched a low of 286p in February, just before GEHE, the German group, took its first £377m tilt at the company.

GEHE has had a field day. As it points out, in July 1993 Hoare Govett, AAH's own broker, was expecting earnings of 43.2p for the year ending in March. Since then, after a series of cuts, that prediction has been halved and the company recently estimated earnings would be 21.5p for last year - 38 per cent lower than in 1993-94 and well short of the 33.2p peak, excluding exceptionals, achieved in 1990. The contrast with arch- rivals UniChem, which has lifted earnings by over 50 per cent during the course of the recession, could not be clearer.

That the present management of AAH has failed shareholders is not in doubt. The question is whether GEHE is paying enough for control. The latest and "final" offer, worth just over £400m or 445p a share, is finely pitched. At nearly 21 times last year's estimated earnings, GEHE can justifiably say it is being generous, and the absence of a white knight at this late stage makes it increasingly unlikely that one will appear.

But AAH is significantly more valuable to GEHE than to most bidders not precluded by monopolies considerations. Already large or dominant in the German and French markets, it would dearly love to gain a similar position in another substantial area of operation.

AAH would not only deliver about a third of the UK and Irish markets, it would raise GEHE's overall European share by perhaps 3 percentage points to about 10 per cent. Healthcare budgets remain ever more strictly controlled by governments, but that command of the market should eventually give it substantially more buying power.

In the short term, GEHE would also reap the benefit of the £14m of cost savings the AAH management has promised to wring out of the business over the next two years if it escapes the clutches of the Germans. Raising wholesaling margins to about UniChem's level of 3 per cent could deliver another £10m to profits, on one estimate.

GEHE set the clock ticking yesterday with the publication of its latest offer document. Shareholders have until 2 May to decide. But with the bidder controlling nearly 23 per cent of the equity, the final decision rests with four institutions sitting on a third of the equity.

They could just extract a little more. Small holders would be well advised to sit tight until the last moment, although the nervous may want to take profits now as the price is likely to fall off a cliff if GEHE decides to walk away.

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