Green wins the first round with Trafford

Round one goes to Green Property. It was a resounding win, and one which should weaken its opponent, Trafford Park Estates, the Manchester-based, publicly-quoted property company, which Green wants to embrace.

That Trafford had to reverse its original decision to go ahead with the extraordinary general meeting called to sanction an agreed takeover of Barlows, another British property company, was a sign of weakness. Green wanted that meeting postponed because it wanted Trafford without Barlows. Now that it has succeeded, following pressure from some of Trafford's influential institutional shareholders, where does that now leave Green's proposed offer of £135 million sterling to £164 million?

Trafford has already insisted that the offer for Barlows was in the best interests of its shareholders and that Green's offer undervalued the company.

The directors of Trafford are not in a very strong position. They control only 5.5 per cent of the equity so they are dependent on the support from the other shareholders, in particular the 30 odd institutions.

Just six institutional investors own 34 per cent of the company. The largest is Britannic Assurance with 9.59 per cent, followed by Hermes Investment Management (5.77 per cent), Postel Investment Management (5.73 per cent), Sterling Property Holdings (4.8 per cent), Morgan Grenfell group (4.05 per cent) and Fleming Mercantile Investment Trust (3.82 per cent).

Some of these have already clashed with the Trafford board. They rightly wanted the Green offer to be considered, so the Trafford board will be on the defensive.

Nevertheless, decisions by institutions are usually unemotional. They will look at what Trafford has given them in the past and at its prospects. The alternative is the Green cash or share offer.

In sales and profit terms, Trafford has had a cyclical record. Turnover rose from £10.2 million in 1992/3 to £21.0 million in 1994/5, fell to £11.9 million in the following year and recovered to £12.9 in 1996/7. Pretax profits rose from £4.12 million in 1992/3 to £10.4 million in 1994/5 then fell to £6.9 million in 1996/7. There were increases in sales and profits in the following six months.

However, on the plus side dividends rose from 2.80p to 3.90p in the four years to 1996/7. Market capitalisation doubled to £94.3 million.

And importantly net assets per share have been on a healthy upward trend; from £1.232p in 1994/5 to £1.67 in 1996/7. That represents a 23 per cent rise in 1995/6 and a gain of 9.9 per cent in 1996/7. Some market sources are suggesting a 10 per cent rise this year.

If the growth in net assets per share is used to compare the performance of the two companies - and it should be - then Green wins hands down. Green's achieved a 41.7 per cent rise in 1996 and 35 per cent in 1997. After that rapid growth, this is expected to slow down to 11 per cent in 1998 and 12.5 per cent in 1999.

Green's cash offer values Trafford's shares at 185p sterling and the shares offer values them at 205p. It appears to be reasonably valued on the basis of Trafford's net asset backing of around 167p and a projected value of 185p, unless there is some hidden value in its portfolio. Also, the cash offer is at a 16 per cent premium on Trafford's last closing price prior to the offer.

Green's aversion to Barlows, and Trafford's affection for Barlows, indicate different perceptions on how a property company should develop. The Irish company, apparently feels that Barlows has too many small portfolios, indicating that it has a higher target for growth. Also, it feels it can squeeze a lot of benefits from Trafford's own portfolio.

Clearly Green has been a go-go company and should continue to outperform the market average. Trafford is in a different league and it would benefit being part of the more restless Green. Curiously neither company has common institutional shareholders among the over 3 per cent category. A further broadening of institutional shareholders - if the Trafford institutional shareholders were to receive the share alternative - would also benefit an enlarged Green.