Signet shares shine for the lucky few: Compensation for private preference shareholders

PREFERENCE shareholders in Signet, formerly the Ratners group, have for nearly three years been campaigning to get themselves a better deal out of what has proved a very sad investment. At last, for some of them at least, there seems to be light at the end of the tunnel.

Earlier this month, Goldman Sachs, the US investment house, was ordered by a New York stock exchange arbitration panel to pay dollars 2.8m ( pounds 1.8m) to four investors for allegedly failing to disclose to them that Signet securities it sold them would be difficult to trade.

The four investors, two wealthy physicians from Pittsburgh and two former steel company executives, were private buyers who were lured into purchasing the securities from Goldman Sachs when institutional investors were already beginning to have doubts about the quality of the stock.

Goldman says it strongly disagrees with the arbitrator's decision, but it may hasten other settlements to private individuals who may be able to claim that the precise nature of the investments sold to them was not properly explained.

Larger institutional investors do not have this line of argument open to them. They have been following a different strategy, which is to try to force the company to treat them rather more favourably than the other classes of shareholders.

Signet suspended dividend payments to preference shareholders 30 months ago, a situation which has enraged the holders of those shares (whose value is dollars 500m). The company is now nearly dollars 50m in arrears on its payments to these shareholders, who have to be paid before ordinary shareholders can start receiving any dividends.

The bulk of the preference shares are owned by the larger institutional holders, some of which bought them when they were first issued in North America and others that bought them since conditions at Signet deteriorated.

The latter, who treat their investment as if it is more like an equity than a debt instrument, have often threatened action in the form of forcing an extraordinary general meeting and voting sympathetic directors on to the board. So far, however - despite a lot of talk - they have not got far.

A year ago, Jim Jenkins, managing director of First Boston Corp, the New York investment bank, accused Signet of ignoring the interests of its preference shareholders. He said he was considering requisitioning an extraordinary meeting, but it has not happened. This year, it is the turn of Delta Dividend Group, an investment management group based in San Francisco.

Delta Dividend bought its stock in the past few months as a speculative investment. It appears to be supported by Julian Treger, the South African financier who helped restructure Greycoat, the troubled property group. Again there is the threat of an extraordinary meeting.

Delta has submitted a letter to the company asking for a number of demands to be met - including a listing of the shares on the New York stock exchange - and Signet has said that it is preparing a response.

Last week, sources at Delta suggested that it could be some time before an extraordinary meeting is held, even though they intend to force the company into holding one.

There are believed to be two hurdles. The first is that some investors might decline to vote for a meeting if their identities are disclosed. The second is that Delta has to be able to count on more than 50 per cent of the votes of a particular series of preference holders when it calls the meeting.

This is not so easy, since a number of the preference shares are being constantly traded by speculators who think that, though they may never reach their par value again, the shares will one day be worth more than the 30 cents a dollar they are trading at now.

In the meantime, the private preference shareholders with grievances against brokers who sold them stock will no doubt be greatly cheered by the Goldman Sachs payout. Earlier this year, a different arbitration panel found CS First Boston Inc liable for misrepresenting the stability and liquidity of Signet preferred stock. In that instance, CS First Boston did not have to repay investors' money but instead had to pay a small award of damages.

It remains to be seen whether the institutional preference shareholders succeed in forcing the company into a full- scale restructuring. Mr Treger has a knack of succeeding in the end, which should mean more rewards for the preference shareholders, almost certainly at the expense of holders of the group's equity.

However, even ordinary shareholders may take some comfort. According to a recent research note from Ray Bowden at Flemings Research, the value of the ordinary shares could rise to well in excess of 50p (they closed on Friday at 31p) after a financial restructuring, so long as trading conditions continue to improve.

(Photograph omitted)