Smaller Companies: No jean geniality for Pepe holders

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SHAREHOLDERS in Pepe have received anything but a happy new year greeting from the jeans and leisure-wear company. The refinancing document that has been dropping through their letterboxes makes for grim reading.

Shareholders have been told they can either cede control to a new management team and Novel, a Hong Kong group run by the Chou family, or watch the company go under.

But are they really in a no-win position? Like Amstrad, the company wants to go private. But unlike Amstrad, shareholders are not being given the option to be bought out, even though their company is being taken over.

Pepe's net assets at the end of last March were pounds 25m, equal to 92p per share.

There is the option of selling holdings in the market, but at 3p per share it is a very unattractive exit. Pepe was one of the worse performing shares last year, losing 96 per cent of its value.

An offer to shareholders has been virtually ruled out. The Takeover Panel has waived the rule requiring a bid once a shareholder owns more than 30 per cent.

However, Novel has retained the 29.6 per cent stake it bought in March for nearly pounds 7m. Would it let pounds 7m go down the drain if shareholders snubbed the rescue terms?

And are the risk warnings in the document to shareholders who choose to remain with the company as severe as they appear? Novel and the new management of Silas Chou, Lawrence Stroll and Maurice Marciano are, after all, prepared to inject another pounds 7m.

Novel and the management would argue that they are risk- takers and deserve to be rewarded. For a start, Messrs Chou, Stroll and Marciano, and SML, a new holding company incorporated in the British Virgin Islands, will receive annual management fees of pounds 1.5m.

And if Pepe comes good in the next five years, they will have control over 75 per cent of a company that could be worth more than pounds 100m.

The 'if' is not as big as it may seem. Away from the financial nuts and bolts, Pepe is, according to one company source, doing very well in the US, the biggest jeans market in the world. It also has inherent strengths as a brand name.

Shareholders who attend the egm should also ask specific questions about the document. On page 9, it says: 'In the early summer of 1992, it became clear that the company might once again breach its net assets covenant.' It does not explain exactly what the covenant was, or which bank or banks were involved. Neither does it say whether the covenants were breached or are likely to be.

On page 24, administrative and other expenses are shown as climbing from pounds 31m to pounds 42.5m in the year to 31 March. Why? Page 19 says there were exceptional charges of pounds 8.2m, but does not say what they were for.

Last, but certainly not least, page 7 carries a worrying paragraph. One sentence reads: 'It is believed that, in some instances, local management has provided misleading information and, in particular, substantial irregularities in the US are being investigated.' More details please.

Shareholders, who will see Pepe's quote disappear from the Unlisted Securities Market into private obscurity, should challenge these proposals and stand firm for a better deal.

If no offer is forthcoming, they could do no worse than take the plunge and subscribe for the open offer of 726 shares for every 100 they own at 5p each. The shares may not be marketable, but could prove worthwhile if Pepe comes back to the stock market.

(Photograph omitted)