Storm at Matalan as founder's bid 'holds board to ransom'

A furious boardroom row broke out at the discount retailer Matalan last night after it emerged that the group's chairman and founder, John Hargreaves, was holding the company to virtual ransom.

The company revealed that Mr Hargreaves, whose family control 53 per cent of the shares, was "working on a possible offer" for the company. But industry sources expressed scepticism at the prospect of an imminent bid.

In a tersely worded statement, it said Mr Hargreaves had clashed with the board over the level of dividend payout. Without the support of bid speculation this would dampen the share price. The shares closed 3.5p higher at 169p yesterday, giving the company a market valuation of £690m.

Tensions have been rising at Matalan for months, partly because the uncertainty over its future has frustrated its attempt to find a new chief executive - its fourth since it floated in 1998.

Matalan said it had been informed that Mr Hargreaves felt the 6p final dividend proposed by the board was "out of line with the dividend cover maintained by comparable UK quoted retailers". It added that the chairman had threatened to block similar future payouts.

The company rushed out the statement after the market shut because it said Mr Hargreaves had indicated that he planned to raise the matter at the annual meeting on 5 July. It made it plain that the board disagreed with its chairman, who is infamous for having an iron grip on the company despite not holding an executive role.

Matalan said its board had been informed that: "Whilst the Hargreaves' family will not oppose the dividend recommended for 2006 at the forthcoming AGM, you should be aware that in future, the Hargreaves family will not support any dividend that does not have an adequate level of cover and wishes Matalan to return to a dividend policy where the dividend is more adequately covered by the profits and cash flows of the business in line with market norms."

The statement added that the board "did not agree with this assessment given the cash generation of the business". In the year to February 2006, which saw pre-tax profits fall 30 per cent to £56.7m, it said operating cashflow covered the dividend approximately twice. It added: "It is solely the responsibility of the board to recommend dividend levels and for shareholders to vote on them."

Last night's developments set the scene for a stormy shareholders' meeting next week. The company was already under fire from several quarters of the City for its ritual trading disappointments. It has lurched from one sales disaster to another in recent years, lately due to its underperforming homeware ranges.

It is thought the board set Mr Hargreaves an ultimatum of either finding a buyer or cutting his ties. The news that he is working on a "possible offer" for Matalan represents a U-turn for the founder, who has long tried to seek a buyer without success. The group barely owns any of the freeholds on its stores.

One former Matalan executive rubbished Mr Hargreaves' chances of finding a backer. "John is in his 60s, he's never run a leveraged business, he's never worked for a venture capitalist. Someone would have to find £300m to £400m to back a bid at 200p per share. They'd want their heads examined."

A one-time stock market darling, Matalan invented the discount clothing sector, though its prices have in recent years been undercut by rivals from Tesco to Marks & Spencer. In the past Asda, owned by Wal-Mart, has been thought to be interested in Matalan. But Asda's stand-alone fashion stores for its George clothing brand have not gone well, and it is not interested in Matalan.