View from City Road: Reed hopes for a Dutch treat

PETER DAVIS, chairman and chief executive of Reed International, had not been born when Unilever was created or when Royal Dutch and Shell merged in 1907. The City has little experience in the art of creating Anglo-Dutch trading companies.

From the reaction of the respective share prices and the Kremlinology of the new management structures, it would appear that Reed has got the better of its prospective merger with Elsevier.

Reed shareholders will end up with around 56 per cent of the combined group, leaving Elsevier with 44 per cent, though this may be adjusted when the final figures come out. This is directly proportionate to the profits either side will produce this year.

The structure of the new group looks complex but is actually very simple. All the operating companies will be merged and all the financing will come under one roof.

The business will be controlled by a five-man executive committee which in turn will be answerable to a combined board, a British-style unified board rather than Dutch two-tier variety. Both companies will retain their own listings and their own boards, though in practice those boards will be little more than rubber stamps.

The power, of course, is in the executive committee. Here Reed has the whip hand. Mr Davis and Ian Irvine, Reed's deputy chairman, will be present as will Nigel Stapleton, Reed's finance director, though he will not have a vote. Elsevier's two representatives - Pierre Vinken, the chairman, and Loek van Vollenhoven - are both close to retirement.

The fit is good, so two plus two should equal more than four. What worries some shareholders is that Reed's businesses are more cyclical than Elsevier's and so have a better chance of improving profits. If that is true Elsevier's shareholders may have got a larger slice of the cake than they deserve.

However Elsevier's superb scientific publishing operations are unique and are worth more than the 18 times earnings that Reed is paying for the group. Taking that view, the deal looks good.

But, as Reed's shares leapt 9.2 per cent yesterday in a buoyant market, investors have already taken that into account. Elsevier's shares, which lost 9 per cent of their value, may be the better bet.