View from City Road: Trafalgar meets its Waterloo

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IF THERE was any doubt about why shareholders - including Hongkong Land - are campaigning so vigorously for changes to Trafalgar House's management, yesterday's statement by the Financial Accounting Review Panel removes it.

Just last week, in a document urging rejection of the tender offer from Hongkong Land, Trafalgar assured shareholders that any amendments required as a result of the review 'should not affect the aggregate of shareholders' funds' at the last balance sheet date. Yesterday, it disclosed that shareholders' funds have fallen by pounds 20m because it has been forced to change its policy of accounting for advance corporation tax. The panel also indicated that it was unhappy with a 'number of other matters', including the disclosure of its investment in BREL, its former associate.

Hongkong Land, which said yesterday that the affair confirmed its view that the board needs to be 'strengthened quite considerably', is unlikely to be the only aggrieved shareholder.

Trafalgar has agreed to amend its previous year's figures in response to the criticism. So pre-tax profits will fall from the pounds 122.4m reported to pounds 19.7m, while the transfer from reserves required rises from pounds 44.4m to pounds 167.1m. As importantly, distributable reserves are more than halved, from pounds 218.1m to just pounds 95.4m.

But the panel's finding that it was carrying forward too much surplus ACT will also affect future results. This year, the tax charge is expected to be between pounds 35m and pounds 40m - including a pounds 25m ACT write-off - on profits before write-downs of pounds 90m to pounds 100m.

For the panel and for David Tweedie, who is leading attempts to clean up company accounts, the affair is a significant victory. Trafalgar was threatening to go to court to resist the changes. While cynics may suspect that was simply a tactic to delay publication until after the tender offer had closed, the fact that Trafalgar backed down should give the panel confidence.

For shareholders, the only consolation is that the board has accepted the need for boardroom changes; the delay in announcing them is apparently because of difficulties in deciding how to do it, and in agreeing severance terms for Sir Nigel Broackes, chairman, and Sir Eric Parker, chief executive.

Trafalgar has already indicated that its next accounts will be cleaner than clean. Investors should ensure that the management changes go far enough to ensure that there really is a fresh start.

(Photograph omitted)