Once upon a time, no one could ever have accused radiator and plastics group Barlo of being exciting. It made radiators, it made plastic and it often made a profit. And that was pretty much that, writes Barry O'Halloran

But over the past two weeks, it has become one of the more intriguing stories. The company is the subject of a management buyout (MBO) bid, valuing it at 40 cents a share or €70 million.

Chief executive Dr Tony Mullins is the MBO's frontman. The bid's vehicle, Melgan, is backed by Mr Brian Beausang and Mr Aidan Barlow. The latter's family founded the company and its existing members are backing Melgan. In total, the MBO holds 21.7 million shares, or 13 per cent of the company.

The bid is funded through a mixture of one-third equity and two-thirds debt, courtesy of Bank of Ireland. Melgan is raising over €200 million. This will cover the €70 million offer, Barlo's €123.6 million in debt and the bid's associated expenses.

Some of the equity is being provided by a number of "high net worth" individuals, who have bought in at a minimum of €1 million each. They are said to include members of the McCann family of fruit importers and distributors Fyffes.

The offer depends on a parallel de-merger of Barlo subsidiary, Athlone Extrusions. Its management, led by Mr James McGee, Mr Enda Cunningham and Mr Jackie Browne, are buying that company, along with Barlo factories in Newbridge and Slovakia, for €67.8 million. Barlo bought Athlone Extrusions in 2001 for just under €70 million.

Barlo's independent directors, chairman Mr Niall Carroll and Mr John Farrell, this week recommended the offer to shareholders. By Wednesday, shareholders with 36.4 per cent of the total issued shares had irrevocably accepted Melgan's offer. The acceptors included the MBO backers, non-executive board members and institutional shareholders.

The MBO needs at least 80 per cent irrevocable acceptances before the offer becomes unconditional and the bid succeeds. But it may not get that.

Investor and corporate kingmaker, Mr Dermot Desmond, has been steadily building his stake in the company since Barlo formally revealed details of the offer on February 11th. Before that, Mr Desmond held 4.9 per cent of the company through his vehicle International Investment and Underwriting (IIU).

He bought the initial tranches at 39 cents a share, leaving him with little or no margin. However, last week he bought at prices ranging from 42 cents to 44 cents. In total, he would lose over €200,000 on his purchases of the past two weeks if a sale goes ahead at 40 cents.

By yesterday he held 14.08 per cent through IIU and another company, Bottin International. There is speculation that he will build up a large enough holding to effectively block the offer.

Even now, a stake nudging 15 per cent could be enough to effectively prevent Melgan succeeding, if a number of other small shareholders also independently decided that they wanted more than 40 cents.

If the speculation is right, he may simply continue buying shares until he reaches the magical 20 per cent-plus mark. On the basis that he has been buying at more than 40 cents, he should find it easy to pick up the remaining 6 per cent he would need, if he decided to scupper Melgan.

In that case, all he has to do is refuse the offer. That would effectively mean the end of the sale, unless Melgan increases its offer. It has reserved the right to do this, but there is an unusual clause in the offer document that, at the very least, indicates that it is not going to do this.

Melgan has agreed that if another party makes an offer for the company at 44 cents or higher before March 12th, its members must accept this price for their Barlo shares if Melgan does not match or increase the 44 cent-plus offer within 14 days.

If Melgan does make a counter offer on this basis, and a third party makes a subsequent higher bid, its members are simply obliged to accept that bid. There is no scope for the MBO to put together a further counter offer.

It seems clear from this that Dr Mullins and Melgan's other backers think 44 cents a share is the outer limit of the company's worth. And that is the crux of the issue, whether or not Barlo is worth more than 40 cents a share.

There are some who argue that it is. Merrion Capital analyst Mr John Mattimoe is on the record as saying 45 to 55 cents is a fairer valuation. His assessment is based on a multiple of 5.5 to six times earnings before interest, tax, depreciation and amortisation (EBITDA) of €35 million, and the firm's ability to generate cash.

Melgan, the independent directors and both parties' advisers, have rejected this. The offer document states that 40 cents is a 90 per cent premium on Barlo's average closing price in the 12 months to July 10th, 2003, the day it was first revealed that Dr Mullins and his colleagues wanted to take the group private.

It also takes into account the fact that its average debt is €123.6 million. Dr Mullins told The Irish Times last week that taking this into account, Melgan's offer is pitched right in the middle of the 5.5 to six times EBITDA range, as Melgan is raising almost €200 million. Factoring in the company's exposure to the more sluggish sections of the European economy, he argued that 40 cents was a very fair offer.

This week, Mr Stuart Draper of independent broker Dolmen Butler Briscoe produced an analysis supporting Melgan's bid.

At this stage, the shareholders must decide to sell to Mr Desmond or to give the goahead to Melgan's offer at a meeting on March 24th. Until then, Barlo could continue to provide plenty of excitement.

Is Tony Mullins offering a fair price for Barlo? Have your say on Ireland.com/business/index/htm. A selection of comments will be printed on the business pages tomorrow.

Feedb@ck