More explanations called for in Refuge deal

When United Friendly and Refuge Group announced agreed merger terms a couple of weeks back, most of us were so blinded by the obvious logic of the deal that we did not think to question the terms. Refuge's largest shareholder, Perpetual, has since been crunching the numbers and unless it is convinced otherwise at a meeting today with the company and its advisers, is determined to vote against the transaction. Refuge is equally insistent that a renegotiation of the terms is "out of the question" and is confident the deal will eventually go through as written.

The stock market is not so sure. Perpetual's case is a strong one and Refuge's explanations not wholly convincing. Perpetual has four basic problems with the terms. The first is that Refuge should have held out for a higher valuation of its "orphan estate" - the life fund assets which the DTI has agreed should belong to shareholders - and that in any case, the estate has been inadequately represented in the terms of the merger. The same is true of the company's pension fund surplus, Perpetual claims; a much higher proportion of the surplus should have been factored into the deal.

The third contention is that Refuge has steamed ahead with the deal without establishing or stating what the cost benefits of the transaction are or how they will be shared between policyholders and shareholders. Finally, the dividend is unfair, claims Perpetual. For United, the forecast dividend amounts to the whole of distributable profits. For Refuge, it is only two-thirds. On the face of it, then, Refuge shareholders should be getting a majority of the combined group, not the minority they are served up with.

Refuge and its advisers, Phoenix Securities, have answers to all these points, but they are not as robust as you might expect. Moreover, they are more in the nature of excuses than convincing explanations. On the size of the orphan estate, for instance, they say that this is the maximum the DTI would allow, and that the DTI's word is final. On the other hand, Perpetual may be right to claim that a more vigorous, determined and less hasty approach might have resulted in a better deal. The United Friendly surplus was valued at only pounds 275m when the DTI first pronounced on it some while back. Eventually it was negotiated up to pounds 500m.

Then there is the unexplained fact that the estate was discounted by 20 per cent for the purposes of valuing Refuge. Why? Even more perplexing is Refuge's refusal to disclose what size of pension fund surplus has been factored into the valuation, or how this was established. This might reasonably be thought of as a quite insulting omission, but there's worse. It is the old fall-back position that these are complex businesses, hard for the likes of you and me to understand. Dear oh dear.

There is a real possibility that Refuge and its advisers have been caught napping here, that it has taken Perpetual to point it out to them, and that they are now too embarrassed to admit it. At the very least, there has been a highly complacent failure to explain adequately either the nature of the methodology or processes used in arriving at the valuations. As a result, Refuge and its advisers risk losing the deal.