Pentos poised for pounds 50m rights issue to repair damage in three chains

Pentos, the ailing book and stationery group, is poised to ask shareholders for up to pounds 50m, possibly this week, in a rights issue to repair the damage caused by write-offs and losses in its three chains, writes Heather Connon.

The cash call has been expected for months, although the amount is more than double what the City had forecast. That reflects the decision by Bill McGrath, who took over as chief executive at the beginning of the year, to provide about pounds 50m for the write-off of assets and goodwill. Together with an anticipated pounds 15m trading loss, that will push the group into a pre-tax loss of at least pounds 65m for 1993, which will eliminate the pounds 37.2m of net assets shown in the group balance sheet at the end of 1992.

The group has already canvassed some of its largest shareholders to assess their reaction to a rights issue and it is believed that most are prepared to give their support to allow Mr McGrath time to turn the business around.

He has already made a number of changes, including removing Frank Brazier as head of Dillons and transferring Mark Jenner from his post as managing director of Athena to become company secretary. Mr McGrath is now running Athena himself and he is believed to consider that the chain can be turned around by re-positioning it and focusing its product range - largely cards and posters.

The group's problems stemmed from debts taken on to finance a spree of acquisitions in the 1980s, when it acquired Rymans, Hatchards and Wilding Office Equipment - much of which has now been sold at a substantial loss - as well as the consumer recession. Terry Maher, who masterminded the group's expansion, left the group at the end of 1993 after pressure from its non-executive directors.

Pentos' problems were exacerbated by the group's accounting policies. Mr McGrath has conducted a detailed review of these and will take a more conservative approach, with changes in depreciation and other accounting treatments.

The group's borrowings peaked at pounds 86m in October, although they are likely to have fallen since as the group earned income from Christmas sales. Last month, it revealed that all its 1992 profits came from reverse premiums - incentives offered by landlords to persuade tenants to take up space. These amounted to pounds 6.3m compared with a pounds 2.3m pre-tax profit for the group as a whole, but are expected to have fallen to about pounds 3m last year.