Investment: No Pain, No Gain: Our Man's Portfolio - GW&B engineers win race to buy little 'uns

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The Independent Online
THE pounds 75m AGREED takeover bid for engineer Cirqual should have produced a gleeful reaction at Crossley House, Halifax, home of an obscure AIM-traded company, Gartland Whalley & Barker. But it did not create immediate joy for shareholders, with the price hanging around 105p against a 12-month high of 154.5p and a best-ever 178.5p.

Yet the Cirqual strike represents further evidence that GW&B could be on a winning run. The group is not quite Yorkshire's answer to Kohlberg Kravis Roberts, the US buyout specialist. But there are similarities. The Halifax-based corporate nursery was started a decade ago by Tony Gartland, who developed the FKI engineering group, and engineering chums. Lord King of Wartnaby, the former British Airways chief who headed the Babcock International engineering group, is a founder-director.

GW&B is a financial dealmaker with a strong base in low-tech manufacturing. Clearly, the small-cap share revival which took that index to 1999 highs, is generating increased momentum in GW&B's world. Mr Gartland could claim to have anticipated the rally for long-neglected little 'uns. In his recent interim statement he said: "We believe the weakness in the small company quoted sector to be a temporary, mainly cyclical phenomenon and expect a recovery in sentiment."

The bid for Cirqual provides another illustration of the increased interest in the tiddlers and the consequent growing level of corporate activity. GW&B has 28 per cent of Cirqual which makes components for aerospace, automotive and electronic industries. With shareholders claiming nearly 60 per cent of the engineer's capital supporting the offer - from metalbasher L Gardner - it is a done deal. The bid, in cash and shares, prices Cirqual at around 250p; the shares are 246p against a 337p high. Cirqual, once wholly owned by GW&B, was floated two years ago at around 140p. The GW&B Halifax nursery joined AIM in 1996 when it indulged in a classic reverse takeover of a shell company, Select Industries.

GW&B has two other quoted associates, Aquarius, a baths-to-lampshades business (54 per cent owned) and Quantica a training and recruitment group (44 per cent). Aquarius (124.5p) is capitalised at pounds 28.5m and Quantica (49p) at pounds 20m. There are three unquoted groupings, including a US maker of precision components. GW&B aims to bring its companies to the market. It specialises in developing groups by providing financial and management support and producing bolt-on deals. For example, its last acquisition was a small office furniture-maker which went into Ofquest, its office interiors group.

The recovery in small-cap shares should encourage GW&B to seek flotations for its interests. With the market undercard in the doldrums for so long, share listings have not been attractive. But a float is a far more appealing cash-raising exercise for the Gartland team than selling to venture capitalists or trade buyers.

At GW&B's share price it is selling on 8.9 times prospective earnings and offers a likely dividend yield of 5.4 per cent. Gearing was 21 per cent and net assets around 71p a share. Improved prospects suggest the shares are due for a re-rating.

GW&B, a narrow market with directors and friends accounting for 85.7 per cent of the capital, suffers from profits confusion. Its interim results displayed a modest fall or a near wipeout, depending on interpretation. On what is called a total return basis, where the value of investments is taken at present prices, the depressed state of small company shares at GW&B's April cut-off mark showed profits had collapsed to pounds 20,000. But on a more conventional accounting system there was an pounds 8.2m profit (down from pounds 11.9m).

For this year a conventional profit of pounds 18.7m (pounds 24.2m) is the likely outcome. The total return figure is difficult to calculate, thanks to the small-cap revival and the Cirqual deal. It could hit pounds 10.8m, says Simon Flather at research group BrokerLink.