Merger is looking good for Donloe

The only surprise about the "merger" talks between Dunloe House, the property company controlled by Dublin solicitor, Noel Smyth and Ewart, the Belfast property firm, is that they have started so early. It is less than two months since the Dunloe shareholders sanctioned the purchase of a £21.8 million property portfolio. That gave Dunloe a sufficiently large base to go after the Belfast company.

The two companies look a good match on paper. Ewart's solid chip portfolio would provide Dunloe with a firmer base. Dunloe's restless expansion programme, led by the visionary Mr Smyth, should provide Ewart with that extra push to expand at a more rapid pace.

Mr Smyth who owns 26.5 per cent of Ewart would probably have the support of Ewart's chairman, Brian O'Connor, who owns 15.9 per cent.

That would give him the capability to gain control despite opposition. But that would not make much sense; a vocal minority could put clamps on Ewart's development. What Dunloe needs is total control of Ewart. With the executive management of Ewart not too pleased by the overtures, what are the chances of a successful amalgamation?

Dunloe, more than three times larger than Ewart, would effectively be taking over the Belfast company. It has two separate hurdles; first, the Ewart board; and second, the outside Ewart shareholders. The Ewart board would probably have to vote on the merits of any proposals without the presence of two directors; Mr Smyth and Mr Stewart Harrington, currently managing director of Dunloe.

That leaves five board members. Mr O'Connor, chairman, is likely to favour any reasonable deal but he is understood to spend a lot of his time in Hong Kong. Mr Harold Ennis, a non-executive director, who was responsible for building up Boxmore International into a thriving company, is likely to take an independent stance. Indeed, he should espouse the voice of reason.

The three executive directors, Mr Barry Gilligan, chief executive, Mr David Robinson and Mr Nick Deeny, are likely to be apprehensive about a deal with the Dublin property company. They were to the forefront five years ago, with former nonexecutive directors, in successfully opposing an approach by Mr Phil Monahan's Monarch Properties, then advised by Mr Smyth. Relations have improved since Mr Smyth gained his stake in Ewart and took a seat on the board. However, the three executives continue to be suspicious of Mr Smyth's motives. They have share options, but they are not sufficiently large to provide them with a financial bonanza.

Mr Gilligan has options over 420,000 shares at prices ranging from 43p to 66p, compared with Friday's closing price of 75p. Mr Deeny has options over 285,000 at 43p to 66p, while Mr Robinson has options on over 285,000 at 43p to 81p. The executive directors can, of course, vote against an amalgamation but they would have to justify such a decision. Indeed, in that scenario they would have to come up with an acceptable alternative (they could get a buyer for Mr Smyth's shares, or propose a tie-up with another group). And they can be expected to take a close scrutiny of Dunloe's property portfolio, particularly the Cabinteely site which has been optimistically valued at £28 million.

In the event of a bid by Dunloe, Mr Smyth can, of course, vote in favour. If Mr O'Connor concurs, then Dunloe would be in a strong starting position with 42 per cent acceptances.

Dunloe will need a recommendation from the Ewart board. To achieve that it will probably have to concede some of its assets.

Ewart's shares have, up to recently, been traded at a large discount to its historic asset backing. In contrast, Dunloe shares, prior to the latest purchase and placing, which raised £25 million, had an unsustainable hope value.

Ewart's shares are now on par with the asset backing but that valuation could be enhanced by a revaluation. Dunloe's are close to asset value. Dunloe may have to value Ewart's shares at a minimum of 80p to gain control, and that would imply around four new Dunloe shares for every one Ewart share.

If discussions get that far, then Ewart may well ask for a cash alternative. In that scenario, Dunloe would have to ensure that its gearing is kept at a prudent level.