Unidare has not lived up to its promises

It may have come as a surprise that two investors - financier, Mr Dermot Desmond and Mr Pierce Casey - had the audacity to openly challenge Unidare's proposed US acquisition. More surprising was the lack of support they received from the Unidare shareholders in their attempt to stop the deal.

Granted they almost succeeded; 48.3 per cent of the votes cast voted against the deal while 51.7 per cent backed the Unidare board's recommendation. But a different message emerges when these figures are scrutinised. To gain a fix on the outside support garnered by the two sides, their shareholdings - the two investors have some 29 per cent and the board has about 10.6 per cent - should be excluded. This means that Mr Desmond and Mr Casey, despite a strong campaign to rally institutional shareholders to their cause, only managed to get outside support from shareholders representing around 1.6 per cent. In contrast, the Unidare board got some 22.6 per cent. Considering Unidare's poor record and repeated profit warnings, it is surprising that more did not rally to their plea to give the deal the thumbs down. While shareholders representing 36 per cent of the equity did not vote, it appears that institutional support was pretty solidly behind the board. So who is right?

The US company's uninspiring name, Oklahoma Rig & Supply Company (ORS) - a US wholesaler serving the industrial and oil field supplies distribution channels - would hardly engender much enthusiasm, but its profit record looks sound enough. Pre-tax profit rose from $2.7 million in 1996 to $4.9 million in 1998. There is a glitch: profits are expected to fall this year. The initial consideration of $35.1 million is less than six times historic operating profit (excluding non-recurring directors' remuneration). That is a reasonable multiple but the consideration is on a large premium on the net assets of $15.4 million. There is a provision to bring the total consideration up to $60.1 million (less net debt) but this is based on targeted earnouts up to the year 2003. However, a note in the offer document says the directors' best estimate of the deferred consideration is $9 million. If that is achieved the prospective operating multiple would come down to under five, according to Unidare. That would be strongly earnings enhancing. However, Unidare has not lived up to its promises four years ago when it planned to "refocus the group". Profits this year, for example, are expected to be under £7.25 million which will be lower than the £8.13 million generated in 1995.

But Unidare is very bullish about the latest acquisition. "The ORS product range will be supplied through the Unidare network [which currently comprises 15 locations in the US and three in Canada]. Your board believes that this will result in a substantial increase in group sales of MRO [maintenance, repair and operations] supplies in the US and Canada which, up until now, were not easily serviced by ORS from Oklahoma," according to Unidare.

It is also looking for benefits from an integration of its operations with Nasco, Unidare's US subsidiary. And Unidare believes that the enlarged group "will provide a solid platform for future growth, both organically and through acquisitive development".

The two investors do not believe Unidare and say it is a very risky strategy given Nasco's historic performance and notes that "ORS is losing its key business builder and does not appear to have adequate management in reserve". And it argues that both Nasco and ORS will need significant increase in working capital investment as the business is built up in the local warehouses which "could result in a significant challenge for Unidare over the next few years".

Obviously very contrasting views. So far Unidare has only delivered a dismal performance and its strategy will only be proved correct if the acquisition of ORS bears fruit. Regrettably that will take a few years to establish. In the meantime, the motive for having the 29 per cent stake will have become clearer. However, if the acquisition does not live up to expectations, the position of Unidare's board members would become untenable.