The Investment Column: FKI battens down the hatches after Melrose bid

Georgica; Three's a Crowd
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The Independent Online

Our view: Hold

Share price: 64.75p (-1p)

FKI, the engineering company that received a take-over approach from investment group Melrose on Friday, has started shoring up its defences. Whether they prove to be sound enough to repel a determined bidder remains to be seen.

FKI, in an interim management statement yesterday, said it expected to report strong trading growth in 2008. However, the picture is patchy across the group. The lifting products and services division – manufacturing wire ropes and fittings for the mining and oil and gas industries – and the energy technology unit are both in reasonably robust shape.

Energy, supplying turbogenerators and other power equipment, has seen its order book grow by 22 per cent to £324m over the past 10 months, and sales for the current year to March are now likely to be up by 25 per cent.

On the other hand, FKI has made no secret of its intention to try to find buyers for the other legs of the business. Logistex, which services airport baggage handling systems and has freight and distribution operations, is currently suffering from delays and deferrals, affecting a number of projects linked to the US retail sector.

The crisis in the US housebuilding industry is also badly hitting FKI's hardware division, which is a leading supplier of windows and doors to DIY stores. Business is grim, with housing starts down a thumping 24 per cent. FKI has tried some restructuring but this is likely to have only a marginal impact on performance.

The group has been trying to reduce its exposure to the US, which accounts for 63 per cent of total sales and 81 per cent of operating profits. There are also balance sheet pressures.

The group's interest bill is running at £32m a year. The recent cuts in US rates have come too late to ease the pressure in the current year. Meanwhile, it has to secure an extension to a revolving debt facility of £120m due to expire in April 2009. However, no covenants are in danger of being breached. Melrose has made an approach at 70p – or under seven times expected earnings – valuing FKI at £411m. Investors must rue the day the board rejected a 130p-a-share bid last Aug-ust from the private equity giant Blackstone. A few months later, the shares began heading sharply south after a profits warning.

There were no surprises in the trading update so Melrose is unlikely to have been frightened off, at least at this stage. The Melrose bid might flush out another offer but in current tight debt markets that cannot be taken for granted. The shares rose on the approach but are still below the offer price, suggesting there is not much hope of a higher bid emerging. Hold.


Our view: Hold

Share price: 39.5p (+3.75p)

Ten-pin bowling has a habit of reinventing itself in Britain. Many companies over the years have tried to build a leisure empire based on the appeal of the game, only to find their hopes dashed by changing consumer preferences.

A chain of 39 bowling alleys now represents the main trading asset at Georgica, which has been stead-ily breaking itself up as it liquidates its debt mountain. Last year, it raised £118m from the sale and leaseback of a portfolio of properties along with the Riley snooker clubs business. The timing was good. It frankly admits it would not have raised the same amount today.

The final dismantling of the group was due to have taken place in December with the sale of the ten-pin bowling business but the deal fell apart as the credit squeeze sapped the resolve of the potential buyers.

Geogica expects a sale to take place when credit conditions improve, although that could be some time in the future. The company, now virtually debt free, can afford to sit tight. There are also eight properties on its books which could fetch £15m. The group is currently valued at £43.7m.

The bowling centres are in reasonably good shape, benefiting from improved investment, better marketing and other improvements such as online booking relieving the frustration of waiting until lanes are free.

During the year, turnover from bowling fell by 2.5 per cent to £65.7m and earned £10.7m before charges. Trading has picked up in January, with takings up by 1.5 per cent.

Georgica now has a 20 per cent share of the ten-pin bowling market – with two new centres due to open this year and four more in 2009 and 2010 – making it an attractive proposition for a leisure operator or private equity group keen to acquire a cash generative business with a strong history of revitalising itself whatever the public mood. Hold.

Three's a Crowd

Our view: Fun punt

Share price: 2.5p (unchanged)

Even in these belt-tightening times, the idle rich still need entertaining. So Three's A Crowd, an events management company fronted by London society girl Tara Palmer-Tomkinson and chaired by veteran professional investor Mark Watson-Mitchell, had little trouble raising nearly £500,000 when it listed on the lightly regulated Plus Markets exchange in December.

Her team has been busy networking and deals are starting to flow. The firm is booking artists, celebrities, sports stars – all the normal suspects – for a gaming junket at Wembley next month expected to attract more than 40,000 visitors. The aim is to generate fees by organising charity galas, product launches and other corporate functions.

Next month it launches an online lifestyle portal enabling people to book film and theatre seats and concert tickets. The hope is to create value in the brand. The shares have drifted below their 3.5p placing price.

Highly speculative – but fun.