View from City Road: Fleming's action a mystery

Small shareholders have good reason to feel aggrieved over Fleming Investment Management's decision yesterday to sell control of Invergordon Distillers to Whyte & Mackay.

Not only were they kept out of the debate over the future of their company, they were also denied the opportunity of seeing whether a higher price could have been extracted from Whyte.

Determining a realistic price is even more difficult in this bid than in others because of the current poor state of the Scotch whisky industry. What is certain, however, is that the outcome would have been very different if Whyte had been forced to court a 3 per cent shareholder.

That would have left Whyte short of absolute control, yet it would have been obliged by the takeover rules to fight a bid battle, since 3 per cent is above the amount it is allowed to buy each year without a full bid. Fleming, in that case, would have had a very strong hand indeed and undoubtedly would have pushed for a higher price.

The mystery is, why did Fleming not push harder for a bigger premium for its own stake, never mind for other shareholders? The exit multiple at 300p is 19.5 times on analysts' forecasts of taxable profits of pounds 29m and earnings per share of 15.5p for the year to December. That looks generous, but the whisky industry is almost certainly bumping along the bottom.

Furthermore, takeover bids often revolve around more issues than price. Remember how confidence got in the way of strategy when Greene King spectacularly failed to take over Morland with an initial bid platform of 43.5 per cent?

The episode also brings into question the logic of merchant banks being advisers as well as large shareholders in a company. Fleming Investment Management realised the danger of a conflict of interest and hired SG Warburg to advise on the sale of its stake.

Invergordon's shares have been artificially propped up over the past two years by Whyte's presence on the share register. But, even so, there is still an unsolved mystery about whether the predator would have been prepared to pay more than 300p.

While Fleming's exit appears to have been achieved at a high multiple, it does not do justice to Invergordon's recovery prospects.