View from City Road: Lasmo's document fails to convince

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The Independent Online
This column seems to be alone in arguing the merits of Enterprise Oil's pounds 1.45bn bid for Lasmo. Everyone else has swung the other way with the result that, in the absence of an increased offer from Enterprise, it is beginning to look at least possible that Lasmo might survive with its independence intact, an eventuality that would have seemed incredible just six months ago.

This is, after all, a company whose recent record has been one of unmitigated financial and management disaster. Lasmo's ability to raise itself from the dead must give hope to all underperforming companies wherever they may be.

Enterprise, however, only has itself to blame. So far it has managed to fight out the campaign in inadequate fashion - a classic case of attempting to snatch defeat from the jaws of victory.

Enterprise bid too little too late to be sure of undermining Lasmo's belated but reasonably impressive attempt to pull itself together.

Badly wrongfooted by the Takeover Panel's decision to force a declaration of interest before it was ready to bid, Enterprise has been losing the public relations battle ever since.

When finally it came out with its halfway house of an offer - special low-yielding Enterprise shares - the City's reaction was one of ridicule. Everyone has been waiting for goody-goody gumdrops Enterprise to fall flat on its face, and finally it seems to have done so.

But Lasmo cannot expect Enterprise to do all its own work. Finally it had to issue some form of defence itself. It did so yesterday, complete with pictures of the 'new' management team.

Even by Lasmo's standards, this is a remarkably unimpressive document. Difficult though it might seem, Lasmo has managed to come close to rivalling Enterprise in the inadequacy of its argument. All of a sudden Enterprise seems to be in with a chance again. The basic line is that Enterprise needs Lasmo more than Lasmo needs Enterprise. On the face of it, the case looks reasonably compelling.

For 56 per cent of last year's cash flow and 46 per cent of proven reserves, Lasmo shareholders are being offered only 40 per cent of the equity and initially just 11 per cent of the dividends of the combined group.

Nor does Lasmo need Enterprise's money - it is quite capable of funding its pounds 800m of planned expenditure from internal resources, the document claims.

Scratch the surface, however, and you find a considerably less convincing case. The argument about finance is all so much tosh. Lasmo's rosy analysis of the future completely fails to take account of the fact that it needs to pay off pounds 436m of debt and preference shares.

Lasmo also implies that last year's cash flow of pounds 202m will be maintained. The reality is that this year and next it will be significantly lower.

By the end of 1996 gearing will be well over 100 per cent again. If there are any slip-ups in the development programme, Lasmo will need another rights issue.

For Lasmo to attack Enterprise's record is also a highly dangerous line. It is perfectly true that since 1989 Enterprise's production has risen 60 per cent but its earnings have fallen 40 per cent. By the same token, however, Lasmo's production has risen 167 per cent and its earnings per share have gone from 4p to minus 7p. Enough said.

Enterprise will have to raise its offer to get Lasmo, that much now seems certain. Given the financial constraints Enterprise is under right now with an uncovered dividend, it may have difficulty doing so. But Lasmo is by no means home and dry yet.