Investor/An insider's guide to the market: The recent announcement from Tony Mullins, chief executive officer of Barlo, that he was considering making an offer for the entire share capital of the company signals another in a steady stream of Irish-quoted companies that have been going back into private ownership.
Several of these deals have been in the technology sector involving once high-flying technology stocks whose share prices had fallen dramatically with the bursting of the technology bubble.
However, the largest Irish "take-private" deal in recent years was the takeover of the fixed-line business of Eircom by a consortium led by Sir Anthony O'Reilly. Those investors that bought into Eircom on its privatisation will have been interested in the recent financial data issued by Eircom. Since the buyout, profits have risen sharply to €180 million in the year to end-March 2003 and, in addition, some of the non-core businesses such as the Yellow Pages have been sold at quite good prices.
This good operational performance combined with a major restructuring of debt to take advantage of current low interest rates enabled the company to pay its shareholders a very large dividend of €446 million.
As well as feeling somewhat envious of this strong performance, the "old" shareholders in Eircom must be wondering why the previous management could not have pursued a similar strategy to the benefit of the then investors in the quoted shares.
The Eircom example highlights the key drawback to shareholders when a company is taken private which is that they forgo any potential future upside in the value of the business.
This contrasts with a merger or takeover situation where shareholders will usually have the option of participating in the upside of any new merged entity. In Eircom's case there were a number of competing bids for the company at the time and presumably the eventual price reflected a fair takeover value for the company at that time.
However, in the case of buyouts that are led by the existing management, the absence of competing bids often means that it can be very difficult to judge what is a fair price for the businesses in question.
In this context, existing shareholders in Barlo are likely to take a jaundiced view of the approach from the current chief executive officer.
Barlo has had a chequered past and this has been reflected in a share price that has fallen from over 100 cent in early 2000 to recent levels below 20 cent.
The announcement of the management takeover approach brought the price back up to over 30 cent.
Barlo's business activities are in cyclical sectors, primarily in the manufacture of radiators and sheet plastics.
The company has production sites in Continental Europe, Ireland and the UK and has a significant share of the European market for radiators and clear sheet plastic.
Barlo has expanded via acquisition in recent years, most notably with the takeover of the quoted Athlone Extrusions.
High debt associated with these acquisitions combined with a sharp slowdown in European markets decimated Barlo's profits in 2002 leading to the collapse in its share price.
Since then, the company actively cut costs and positioned the business to pay down its debt to a more sustainable level.
Net debt peaked at approximately €140 million in 2002 but is now declining by about €15-20 million per annum.
Although Barlo's business environment is likely to remain difficult, the company does seem to have taken action to cope with ongoing tough and competitive markets. Therefore, with debt being paid down, existing shareholders are likely to want to wait to benefit from any recovery in the share price. At a price of 30 cent, the price-earnings ratio (PER) of the company is a lowly 6 and it is difficult to envisage many shareholders being prepared to sell at such a valuation.
Therefore, the indicative offer of 30 cent a share from management seems to be an opening shot and most shareholders' predilection will be to sit tight and await developments.
Research notes and comments from Dublin's stockbrokers will serve to bolster shareholders' likely reluctance to sell at the indicated offer price.
After crunching the numbers, stockbroking analysts' assessment of a fair take-out value for Barlo indicate a share price in the 40-55 cent range.
A take-out price at the higher end of this range would probably require another bidder to enter the fray, thus creating a competitive bidding war for the company.
In the absence of this occurring, shareholders may well look at the Eircom experience and decide to hold onto their shares in order to benefit from the hoped-for recovery in the underlying value of Barlo's business over the medium term.
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