Somerfield's pounds 570m float target worries analysts

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The Independent Online
Somerfield, Britain's fifth largest supermarket chain, yesterday tried to buck the increasingly tough new issues market by setting a flotation price at the top end of City estimates.

In its prospectus, Somerfield said it hopes to raise pounds 540m-pounds 570m from next month's proposed flotation at an indicative share price of 180p-190p.

Some analysts, concerned about Somerfield's position in the cutthroat food retail market, had expected the company to fetch as little as pounds 480m.

Confidence in the new issues market was dented earlier this week when Monsoon, the fashion retailer, abandoned its float plans.

But David Simons, Somerfield's chief executive, defended the proposed asking price. "We didn't arrive at the number in a vacuum. Somerfield is being floated at a sensible price and a sensible yield." He added that the company had already seen 60 financial institutions.

At the offer price the historic gross dividend yield is between 6.3 per cent and 5.9 per cent while the historic price-earnings ratio is between 8.1 and 8.5 times.

The prospectus also revealed that Mr Simons stands to make up to pounds 5.66m from the flotation under the terms of a previous bonus scheme. Mr Simons and five other directors are also being granted share options valued at up to pounds 1.3m each at the offer price, or four times their annual salary. Mr Simons will also be granted options worth up to another pounds 1.6m at the offer price under a separate long-term incentive scheme.

Some pounds 192m of the flotation's proceeds will be paid to Somerfield Holdings to reduce its debt, regardless of the take-up rate of the offer. The remainder, after expenses, will be passed on to the previous holding company Isosceles, which is expected to pay its senior creditors in full with the funds raised, Mr Simons said. Isosceles will be liquidated after Somerfield's flotation.

Mr Simons said there was no chance of a successful litigation of the company from smaller, unpaid creditors. He also countered criticism that Somerfield depends too much on its store conversion programme for profits growth.

Somerfield, which operates 609 stores, plans to complete the rebranding of Gateway to the Somerfield format during 1997. The bulk of the company's profits growth comes from these modernised stores.

Analysts have pointed to a recent survey from research institute AGB of food retailers' market share, showing that Somerfield's has slipped 0.4 per cent in June compared with 1995, its lowest point for two years.

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