City: Trafalgar shareholders sold a dummy

JUST in case there was any remaining doubt on the matter, it's now official: Trafalgar House, a once mighty name in construction, engineering and property (it built the Severn, Dartford and Bosphorus bridges), is in deep financial difficulties. There can be no other explanation for the pounds 211m rights issue announced last week by a combine that still encompasses Cunard Shipping, the Ritz Hotel, John Brown engineering and Cementation construction.

It was as recently as July 1991 that Trafalgar House last called on shareholders - a pounds 310m rights issue to finance its ill-fated acquisition of Davy Corporation. To have to go back, cap in hand, less than 18 months later with the shares close to their all-time low and ask for more, directors must have been desperate. And indeed they are. Though Trafalgar refuses to concede the point, this is a 'distress' or 'rescue' rights. Smith New Court, the stockbroking firm, described the situation as its worst nightmare come true. It is far, far worse than the stock market was led to believe both by the company itself and its advisers, Kleinwort Benson and UBS Phillips & Drew.

Only last October, the board, advised by Kleinwort Benson, urged shareholders to reject an 85p-a-share tender offer from Hongkong Land, claiming that the price was inadequate and seriously undervalued the company. Naively, like lambs to the slaughter, most shareholders took the advice and rejected an offer that they would welcome with open arms if it were made again today. Hongkong Land ended up with 15 per cent of Trafalgar, but this was much less than it wanted.

Trafalgar can argue, I guess, that four months is a long time in a recessionary climate, and that things have deteriorated significantly since. Furthermore, it was the old regime of Sir Nigel Broackes and Sir Eric Parker, now ousted, that was chiefly responsible for October's badly judged missive. New management is in place now, and there's a chance of a fresh start. The problem is that October's defence document didn't mark the end of the fiction. It has continued to rain down on the stock market like confetti ever since. Just two months ago, the company issued profit figures which it now transpires were misleading in the extreme. Directors left shareholders with the impression that the balance sheet had been cleansed with adequate provisions, that the dividend this year would be held at 6p, that borrowings were under control, that the hotels would shortly be sold and that the company could trade its way out of the mess it was in. Wrong, wrong, wrong, wrong and wrong again. It even said there was no present intention of having a rights issue.

Then there was the annual general meeting last month. No mention here of the pounds 120m of additional write-offs for property and rationalisation costs that the company now says it needs, nor that net borrowings have soared by pounds 237.7m since the year end to pounds 580.3m, with pounds 116.3m of guarantees given to associated companies and joint ventures on top. Still less even the remotest hint that the dividend was to be slashed to 3.25p and that trading is so bad that even this will have to be paid out of reserves. And there's worse. We now learn that Trafalgar House is in breach of three of its banking covenants. Even after the rights cash comes in, it will still be unable to meet one of them. Fortunately, bankers have agreed to waive it. I don't think I've ever come across such a gloomy trading statement to accompany a rights issue. According to Alan Clements, the chairman, there has been no improvement in conditions since the year end and 'our core engineering and construction businesses . . . are anticipating lower levels of activity for the next 12 to 18 months'. Furthermore, 'a number of engineering projects, which we had been contracted . . . have recently been delayed or cancelled'. It's a very different picture from the one painted just a few months ago.

Given this backdrop, it is hardly surprising that negotiations over the rights were accompanied by a massive behind the scenes City row. When Alan Gormly, the chief executive, first approached Kleinworts and Phillips & Drew and said, 'I've got Robert Fleming suggesting they can do a rights issue for us. How about it?', their advice was unequivocal. No way. It simply can't be done. You can't, they said, advise shareholders to reject an 85p a share tender offer one month, with the implication that everything is fine on the ranch, then the next come back with a distress rights issue at 60p a share. Phillips & Drew went further. Initially it told directors that all those who signed October's defence document would have to resign if they went ahead with such a plan. Shareholders would go bananas.

In many respects they were right. But for Hongkong Land and its mysterious stock market counter-party, said to be a Swiss bank, Trafalgar almost certainly could not have got away with it. Though Kleinwort Benson receives a hefty fee for advising on something which initially it said couldn't be done, it is not the underwriter. Robert Fleming, which seems to be acting for Hongkong Land, took that job and Cazenove was recruited to help with the sub-underwriting. Most of this risk has been taken up by the counter party, which thanks to an option to sell to Hongkong Land at a considerably higher price, looks to be quids in whatever happens. If the offer flops, as seems likely, Hongkong Land will end up with close to the 30 per cent shareholding it always wanted, the counter party gets a guaranteed profit and Trafalgar House receives its badly needed infusion of cash. Everyone's happy; everyone, that is, except Trafalgar's long-suffering shareholders.

Over the last two years, they've been repeatedly misled and let down. Somewhere in Trafalgar, there are some wonderful businesses struggling to get out, but it's been hard to see them through the fog. You have to assume that this time round Trafalgar has bared all, that shareholders now have the full facts rather than the finely crafted fiction they've been dished up in the past. Given the track record, however, I wouldn't be too sure of it.