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Vaux dream turns into a nightmare

News Analysis: A rescue plan for the Sunderland brewery has become the casualty in a battle between shareholder value and local pride
FOR SIR Paul Nicholson, chairman of the Sunderland-based brewer Vaux Group, the last few days have degenerated into a waking nightmare as everything he has worked for threatens to crumble into dust. It was bad enough late last year when he put up for sale the group's Sunderland brewery, a huge facade that dominates the centre of the city.

This was a difficult decision for Sir Paul, a pillar of the North-east establishment whose list of interests reads like a roll-call of Wearside's top committees and development projects. The brewery employs 600 workers, sponsors the local football club and has been in the Nicholson family for generations.

But in the name of shareholder value, he agreed to it. Imagine his relief, then, when a saviour emerged in the form of his brother Frank, another pillar of the North-east establishment who sits on the Vaux board and runs the brewing operations. He offered to buy the business for an estimated pounds 80m and was later given four weeks of exclusive negotiating rights.

It was a resolution made in heaven. Not only would it save the brewery and the jobs but it would protect the family's reputation. Sir Paul, a somewhat crusty old Harrovian with the slow rounded vowels of the upper classes, would be able to continue wearing with pride his uniform of Lord- Lieutenant of County Durham.

Now the Grand Design is in tatters. And again, the spectre of shareholder value looms large. The "blame" is being heaped on Vaux's chief executive and finance director, who lobbed a grenade into the Nicholson camp when they said that more value could be realised by razing the Sunderland brewery to the ground and flogging the land for redevelopment while contracting out the brewing of Vaux brands to another operator.

The two rebel directors, Martin Grant and Neil Gossage, were spectacularly sacked after lobbying shareholders behind the board's back after losing the vote on the issue.

The Vaux issue is a straight conflict between a family business trying to do the right thing by the local community and its reputation, and the cold-eyed logic of corporate governance and shareholder value.

The Nicholsons' actions are understandable and Sir Paul apparently excluded himself from the vote on the decision to grant his brother exclusive negotiating rights due to his obvious conflict of interests.

But a look at some figures and the composition of the Vaux board raises serious questions. One view is that the company could have sold the brewery for millions more than Frank Nicholson's offer. This undervaluation excludes any higher price that may have been achieved via closure and redevelopment.

The board is also packed with Nicholson supporters. The leading non-executive director, Stephen Gibbs, is Sir Paul's brother in law. Another, Anthony Wood, has worked at Vaux since 1970 and is a former managing director of its Swallow Hotels division. This is hardly the most impartial group of individuals.

But now, with the board dismembered, Sir Paul faces a further horror. Rudderless, defenceless and with a powerful array of institutional shareholders who must wonder what is going on, Vaux finds itself an enfeebled takeover target. And Sir Paul, like Rocco Forte before him, faces the grim prospect of being remembered as the man who lost control of the family business after more than 120 years.

As one local expert put it: "If that happens the Nicholsons would have lost everything they have worked for." Another says: "Sir Paul is saddened by what has happened but he is holding up the flag of shareholder value."

One North-eastern businessman who knows Vaux well reflects: "The brewery has been uneconomic for years but Sir Paul fought tooth and nail to maintain it. For a while it seemed that he was more concerned with his own image and standing in the local community than Vaux shareholders. But you can see why he is doing it. If you like, this is the North-east wearing its heart on its sleeve."

The decision to sell the brewing operations was taken somewhat belatedly after a long period of under-performance. In the last five years Vaux shares have under-performed the market by 32 per cent. That figure worsens to 63 per cent over the last 10 years. Profits last year were half the level of 1994. Diversifications have performed poorly. Vaux went into nursing homes but later sold them. Its beer brands are popular locally but have little following outside the North-east. The main success has been the creation of the Swallow chain of hotels.

The catalyst came last year when the company received takeover approaches that were thought to have come from Stakis, the hotels group, and Whitbread.

Sir Paul had been in the process of engineering his retirement from the group, though that may now have to be delayed, given the boardroom fall- out. He was groomed for a life in the establishment. After an education at Harrow and Cambridge he joined the Coldstream Guards and later the Northumberland Hussars. He qualified as a chartered accountant at Price Waterhouse and then joined the family business in 1965 at the age of 27. He has been there ever since.

Though he is credited with a sharp mind, those who know him say he has a rather distant air. "It can take him a while to even acknowledge your existence," one colleague says. And while Vaux built a reputation as a caring, paternal employer, Sir Paul is not considered on friendly terms with the staff.

His brother is different. "Mr Frank," as the staff know him, is popular on the shop floor. Though he has the same Harrow and Cambridge background as his brother and, according to one observer "looks and talks like Derek Nimmo," he has the common touch.

His proposal to buy the brewery has cast him in the role of local hero. But if the corporate shenanigans carry on like this, the whole business may be taken over and broken up before he has the chance to successful execute his family's reprieve.

Its salvation, however may be found in timing. Ladbroke's pounds 1.2bn takeover of Stakis earlier this week effectively removes the two most likely predators from the fray.