Pension fund row threatens to scupper Permira's £940m takeover of WH Smith

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The Independent Online

Permira's £940M takeover bid for WH Smith looked to be in jeopardy yesterday, after it emerged that the company's pension trustees had threatened to block the deal if the venture capitalists refuse to cover a £215m black hole in its pension fund.

Permira's £940M takeover bid for WH Smith looked to be in jeopardy yesterday, after it emerged that the company's pension trustees had threatened to block the deal if the venture capitalists refuse to cover a £215m black hole in its pension fund.

Permira and the trustees, led by the company's former chairman Martin Taylor, have been locked in talks over the past fortnight in an attempt to find a compromise. Mr Taylor said the trustees have the power to block the bid if Permira cannot meet their demands.

The dispute arose after the trustees raised concerns over the funding of any takeover deal. Permira is set to fund the acquisition, mainly through bank debt, which would give the lenders first call on the company's assets in the event of the company going bust.

Under the current arrangements, it is the pension fund that has first call on the company's assets - a position it is unwilling to surrender. As a result, the trustees have moved to receive assurances from Permira that they will fill the fund's black hole as part of the acquisition or provide a guarantee that the fund will be financially supported in the event of the company running into difficulty.

While Permira is believed to have agreed to continue WH Smith's policy of repairing the pension fund hole over the next decade, it has so far resisted the demands to fill the hole immediately. WH Smith said it had not been involved in the talks between the fund trustees and Permira, but both parties were keen to dismiss suggestions that the issue could be a potential deal-breaker. But speaking yesterday to The Independent, Mr Taylor said the pension fund had considerable powers that it would not be afraid to use to defend its members' assets.

"If a VC fund was to buy the company - and let me say we are completely indifferent as to who buys it - they would do two things that are a problem," he said. "Firstly, they would greatly increase the borrowings, which in turn increases the risk of bankruptcy. Secondly, in order to get the loan, they would have to grant security to the bank - the effect of which would be to leave the pension fund uncovered.

"What we need is either the money provided upfront - which is the obvious solution - or something which is as good for us, such as some sort of guarantee. Or we would want to at least rank alongside the other senior debtors, such as the bank. In my view, if the pension problem cannot be properly handled, the deal cannot proceed."

Mr Taylor said the pension fund was not willing to rely on the Government's proposed safety net, as it has not yet officially come into force.

The net, which is set to be established next year, would provide compensation for members of pension funds whose companies go bust, leaving former employees without a retirement income.

Permira's offer, headed up by Simon Burke, the former chief executive of Hamleys, and Keith Hamill, the chairman of Moss Bros - both former directors of the WH Smith - has so far been the only bid. However, Cinven, a rival private equity house, last month appointed Merrill Lynch to advise on a possible offer for the company.

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