Outlook: Osmond may have to sweeten bid

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The Independent Online
THE BATTLE for Allied Domecq's pubs has been rich in surprise, so it may be there's more yet to come. On the face of it, however, we seem to be into the final furlong. By injecting pounds 1.5bn of cash into its previous all shares bid, Whitbread has managed to achieve a valuation a little bit above Punch Tavern's pounds 2.85bn, so in theory, it now has the better offer on the table.

Not so, says Punch. By raising its offer, Whitbread is giving away the value of all the claimed synergies and further pushing out the time at which the deal becomes earnings enhancing for its shareholders. Furthermore, Punch says, the whole thing seems still to be dependent on regulatory clearance. If the price of such clearance is a heavy one, then the deal could end up as value destructive. So in fact, Punch claims, Whitbread's offer is still worth less to Allied shareholders than its own.

Does this argument stack up? Certainly the logic is hard to fault, but by the same token, the Whitbread share price should be falling if the analysis is right, devaluing the bid to below that of Hugh Osmond's Punch Taverns. It is not; actually it rose nearly 1 per cent yesterday. Plainly the argument has yet to be fully fought out in the market place, but initial reaction to Whitbread's reposte is not as unfavourable as Punch might have hoped.

There's also the obvious point that if Mr Osmond and his venture capital backers think there is still money to be made from the pubs at these levels, then why shouldn't Whitbread too. Punch can shout all it likes about Whitbread investing for a lower return than its cost of capital, but it needs something a little less esoteric finally to knock Whitbread clean out of the ring.

That something is undoubtedly a yet higher bid. At pounds 792,000 per pub, the price has already advanced to a level fair to make the brow sweat. Has he got any fire power left, or is he going to have to fight it out on the arguments? We'll see, but if Mr Osmond is as good as his word - "I'm here to win" - he may have to up the ante again to be certain of success.

Controlling Sky

MOST PEOPLE are pretty clear about who controls BSkyB, the thirtieth largest company in Britain in terms of stock market value. It is Sky's largest shareholder and chairman, Rupert Murdoch. Much of the inspiration and strategy behind Sky is his, so why shouldn't he continue to run it as if it were a 100 per cent owned subsidiary of his News Corp master company?

As long as Sky keeps marching from one success to another, other shareholders seem happy to have their interests so united with his. There's always going to be a suspicion with a deal maker as consummate as Mr Murdoch that he'll keep the choicest stuff for his other business interests while stuffing Sky with the riskier agenda, but it is hard to point to an unambiguous case of this and so far non executive directors have done a good job in safeguarding the interests of outside investors.

Now, however, there's another powerful financier on the share register and by the look of it, he could be squaring up for a fight. He is Jean Marie Messier, chairman and chief executive of Vivendi. This extraordinarily successful French conglomerate goes against all the modern management textbook rules about to structure an enterprise. Not for Vivendi the boredom of focusing on "core competences".

From water purification to telecoms and pay TV, Vivendi could hardly be more diverse. But one thing Mr Messier is focused on right now is that he's not going to be a passive investor in BSkyB, where he recently acquired a 17 per cent stake. In Berlin yesterday, he told reporters that he would insist on the two board room seats the shareholding entitles him to.

Meanwhile back in London Mr Murdoch has been ruling out a merger with Canal+, which Vivendi controls, and insisting he's not going to allow "a great British asset" like Sky to become a football for French politicians. Mr Messier and Mr Murdoch claim to like each other, and there's plenty of scope for alliances, they say. But the jostling for position is already plain to see.

On the face of it, Mr Murdoch's position is unassailable. Even if Vivendi bought the Sky stakes owned by Pearson and Granada, it would only have 26 per cent of the stock, still a long way behind Mr Murdoch. However, Mr Messier does have the advantage of a foot in both camps, which in the round places him above Mr Murdoch in the battle for European pay TV. Sky's independent directors are going to have to be especially diligent in ensuring ordinary shareholders don't get trampled in this forthcoming clash of the Titans.

Choice decision

SO IS IT to be the bird in the hand, or the two in the bush. As investment cliches go, this must be one of the hardiest perennials of all, and it looms its head again next week. Shareholders in First Choice, the package holidays group, must decide by Thursday whether to risk it and go for the outside possibility of a generous all cash bid from David Crossland's Airtours at some indeterminate stage in the future, or back their board's recommendation and stick with the immediate but in value terms inferior no premium merger offered by Kuoni.

The Airtours bid, potentially worth 254p a share, is mired before the competition authorities in Brussels, and although Mr Crossland holds out the hope of an early resolution, there's not much sign of it. Airtours has a top team of experts working round the clock on clearing the deal with Karel van Miert, the European Competition Commissioner. Headed by Roger Davies, a former member of the Monopolies and Mergers Commission, with a supporting cast of John Swift QC, a leading competition lawyer, Slaughter and May, the City lawyers, and Lexecon, an economics consultancy, nobody could accuse Mr Crossland of not throwing money at the problem.

Unfortunately, Mr van Miert appears in no mood to play ball. He's pushing ahead with an established schedule which involves a formal "statement of objections" in a couple of weeks and an oral hearing of Airtours' case on 30 July. In other words, it looks as if the investigation will go the distance. The outcome won't be known for certain until 5 October.

There is also every possibility he will block the deal entirely, or make it conditional on asset disposals so onerous that it either won't be worth while to proceed, or will involve a substantial price cut. On the other hand, the Kuoni deal appears so poor by comparison that it surely seems worth the risk of wait and see? The see-through value of the Kuoni share swap terms is just 186p - a big, big gap. Ah, but, says the First Choice/Kuoni camp, factor in the merger benefits and put the combined group of a similar multiple to Airtours, and the shares would be worth 264p.

It scarcely needs saying that this price just ain't going to stick in the near term, but it is probably fair to say the shares will be worth a bit more if the Kuoni merger goes through. Furthermore, Peter Long, managing director of First Choice, has done an excellent job of turning his company round, and in the long term this new combination stands every chance of matching Mr Crossland on investment valuation. So a reasonable case can be made for accepting the Kuoni terms. Stick with the bird in the hand.

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