Stakis deal fuels City fees battle

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Schroders yesterday stepped up a City battle to fend off a monopolies inquiry into the fees charged for raising capital for British industry, with the first rights issue to include an auction of underwriting commitments.

The auction of up to one-third of the sub-underwriting saved pounds 400,000 in costs for the Glasgow-based hotel group Stakis, which earlier in the day confirmed the acquisition of Lonrho's five Metropole hotels for pounds 327m, part-funded by a pounds 222m rights issue. Stakis also forecast profits for the year to September of not less than pounds 30.6m.

The significance of Schroders' move, as adviser to Stakis, is that the Office of Fair Trading is nearing completion of an investigation of the City's fixed underwriting commissions, which could lead to an inquiry by the Monopolies and Mergers Commission.

The OFT investigation was prompted by concerns that merchant banks and investment institutions always charge the same fixed rates for rights issues by companies, regardless of the size or type of issue.

This has led to widespread accusations that an unofficial cartel is in operation, raising the cost of capital to British industry.

By introducing an auction, defenders of the City underwriting system hope to produce evidence of new flexibility in commissions and fees, to back the maintenance of the status quo.

Initial reaction was that the savings for Stakis, while less than 10 per cent, were good considering the size of the issue and the market's attitude to hotels.

Recently, the Association of British Insurers and the National Association of Pension Funds wrote to their members advising them that investment banks were considering an auction system, and suggesting they back the idea if it were presented to them.

The auction was to include up to 33 per cent of the sub-underwriting for the issue but Schroders said afterwards that 28.2 per cent, slightly less than the ceiling, was awarded. As a result, Stakis would pay commissions of pounds 4.2m, which is pounds 400,000 - or 8.4 per cent - less than it would have been under the fixed commission system. This included a pro rata reduction in Schroders' own fees to match the cut by the institutions.

The bids for the auction portion of the sub-underwriting sought a commission of just over 1 per cent compared with the 1.5 per cent fixed fee for a six-week underwriting period which applied to the rest.

The hotel deal was welcomed by analysts who saw scope for material improvements in the chain's profits under new ownership. First forecast in the Independent two weeks ago, the deal, which the company says will be earnings-enhancing from the first year of acquisition, marks a big leap for the hotels, casinos and leisure clubs group. The four-for-seven rights issue at 82p, which will raise pounds 222m towards the cost of the deal, compares with a market value of just under pounds 500m currently.

David Michels, chief executive of Stakis, said: "While both groups will learn from each other, the operational and marketing skills Stakis has developed under its current management are expected to impact very positively on the performance and profitability of all five hotels."

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