Woodchester bid is nasty medicine for minorities

GE Capital Corporation, the US finance group, has driven a very hard bargain with its £591 million takeover bid for Woodchester Investments. Indeed, footprints in the fine print of the announcement clearly show it has squeezed very hard at every opportunity. The squeeze is noticeable in three main areas though the official offer document may display more. The first concerns Credit Lyonnais (CL), the financially troubled French state-controlled bank, which owns 54 per cent of Woodchester and has agreed to accept the scant 263p per share offer. Surprisingly, CL has agreed to bear "a proportion" of Woodchester's expenses incurred in connection with the offer. There must have been a lot of haggling over that. The amount has not been disclosed but it could be a cool £3.5 million.

Second, the cash offer includes an alternative redeemable loan note offer. That's not unusual, but the floating rates will be 0.5 percentage point below DIBOR up to the year 2002 and falls to 1 per cent below afterwards. That should cause a big exodus. Third, the decision not to pay an interim dividend displays an underhand squeeze. This dividend is usually paid on November 8th, a date well before the deal is capable of being completed. The shareholders are, in effect, being denied this entitlement. The real offer price is obviously less than the published 263p, but by how much? With a rise in earnings per share from 7.41p to 8.73p in the first half of this year, shareholders could have expected a payment of around 3.6p compared with 3.16p last year. On this basis, the real offer price is 259.4p. The offer has been portrayed, in the joint takeover statement, as representing a multiple of 17.0 times Woodchester's earnings in 1996 and 2.8 times its shareholders' funds. True, but that does not take into account the non-payment of the interim dividend and the rise in earnings since the end of 1996. It should. The earnings multiple comes down to 16.7 and the book value to less than 2.6 based on the interim results. The multiples would be shaved further if projected earnings for 1997 were taken into account and the book multiple could come down to 2.2 in 1998. Clearly, the proposed deal is a satisfactory outcome for CL as it is, in effect, a forced seller. It is not attractive to the minority shareholders who were looking at a potential growth in earnings of some 15 per cent per annum over the foreseeable future. The two sets of shareholders have different priorities and it could be argued that there should have been separate advisers for the minority shareholders. However, the Woodchester board, acting for all the shareholders considered the offers to be "fair and reasonable". The executive chairman, Mr Craig McKinney, who set up the company 20 years ago stands to receive over £7.5 million for his shares and options and it was obviously in his interests to get as much as possible. He and Mr Dan O'Connor, deputy chief executive, have been asked to stay with Woodchester for two years. However, they will not have service contracts. The minorities, of course, have the right to reject the offer. How would GE react to a rebellion by them and what would be their prospects of success? The offer is conditional on GE gaining full control but it is understood that the formal offer document will give the US company the right to waive that requirement. It is difficult to see GE living with minorities, particularly if they were vocal. And looking at the figures it might not have to. In order to compulsorily acquire the shares of shareholders who vote against the offer, GE will need to get acceptances from shareholders representing 80 per cent of the value of the shares and 75 per cent of the number of shares. It already has around 55.6 per cent (53.7 per cent CL and 1.9 per cent directors) and is understood to have received commitments from some of the largest institutional shareholders representing around 15 per cent. If these commitments turn out to be firm, then GE is almost there. The price being offered is disappointing for minority shareholders. The outcome would have been better had it been smaller or had fewer British building societies been going through the conversion stage. However, harsh realities dictated the price. The only three other contenders: Warburg Pincus (it has not been identified as a contender); AT & T and Ford Credit; pulled out because they considered the price too high. As they saw it, it was worth while negotiating when they were first contacted as Woodchester was then valued at £430 million. The subsequent £200 million rise led to their withdrawal. However, Woodchester should benefit overall. Having financially sturdy GE as the parent would provide it with stability. That would be infinitely preferable to the CL link which, up to now, has caused so much uncertainty.