Woolworths faces break-up demand from major investor

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The Independent Online

One of Woolworths' biggest investors called for the group to break itself up yesterday and hand back cash to shareholders, less than 12 hours after Apax Partners dropped its proposed £837m bid for the retailer.

One of Woolworths' biggest investors called for the group to break itself up yesterday and hand back cash to shareholders, less than 12 hours after Apax Partners dropped its proposed £837m bid for the retailer.

Elliott Associates, a New York-based hedge fund that controls about 7 per cent of the high street retailer, reacted to yesterday's 25 per cent drop in Woolworths' market valuation by urging the board to sell its entertainment subsidiaries and hand back the £109m on its balance sheet.

Despite the 13.5p fall in Woolworths' shares to 41.5p, several other big investors gave short shrift to Elliott Associates' proposals, dismissing its exhortations as little more than a desperate attempt to wipe out its own losses. Hedge funds piled into Woolworths after its announcement in January that it had received a takeover approach, building up substantial short-term positions in the stock.

One institutional investor said: "I'm not entirely full of sympathy for Elliott Associates. I would rather trust the board to think about their suggestions at the appropriate time than act to suit the short-term perceived need of a shareholder who wasn't even a large shareholder a year ago."

In an open letter to Woolworths' board, Elliott Associates spelt out several ways it felt the group could boost shareholder value: by conducting a formal auction of the entire group, selling its two entertainment businesses, or leveraging up the balance sheet and returning cash to shareholders. It said it felt the "current composition of the shareholder base" provided an "appropriate context to pursue any of these value-enhancing strategies".

Trevor Bish-Jones, Woolworths' chief executive, dismissed the options presented as "inappropriate". He said: "We had a good, constructive conversation with Elliott Associates and gave them some deeper insights into the business. The actuality is that some of the requests they made are not appropriate." Mr Bish-Jones said it made no sense to sell 2entertain, its joint venture with the BBC, barely six months after setting it up. "You don't spend two years creating something as potentially powerful as 2entertain to then sell it without growing it first.|"

Although Elliott Associates highlighted the £109m surplus cash on Woolworths' balance sheet, Mr Bish-Jones pointed out that come the Christmas build-up, the group would have close to £200m of working capital tied up in extra stock.

Another shareholder said: "Hedge funds were creamed yesterday. Elliott Associates is just talking its book. It is just trying to make some money back as quickly as possible."

Mr Bish-Jones intends to embark on an investor roadshow, with a meeting with Elliott Associates. "If they want to meet they can; if not, the matter is closed," he said, adding that no other investors had echoed the hedge fund's demands during his many conversations yesterday.

Elliott Associates, one of the world's oldest hedge funds because it was founded in 1977, is best known for its role in almost bringing down Peru. In true vulture-fund fashion, it paid $11.4m (£6.1m) in 1996 on the secondary market to buy $20.7m of Peru's debt and then sued for full repayment plus capitalised interest. Vulture funds buy up the debt of poor countries at knockdown prices and use the courts to extract payment in full with interest. Faced with the threat of defaulting - which would have fatally undermined financial market confidence - Peru settled for $57m in 2000.

The hedge fund also lead campaign in 2002 to get Colt Telecom wound up. The campaign failed.

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