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When takeovers raise value

Published:  23 July, 2008

Many studies have revealed that takeovers destroy value for the shareholders of the purchasing company. The mooted savings through rationalisation and size rarely deliver the benefits promised by the acquiring directors and their highly rewarded City advisers.

Take SFI Group, which in the late 1990s aggressively pursued a policy of growth and finally overstretched itself by buying the Slug & Lettuce chain and was hit by impaired cashflow as the boom in high-street bars abruptly ended: effectively the group's shareholders lost everything because it could not fund its debts. On the other hand, Pernod Ricard has shown that aggressive expansion through acquisition can be very good for shareholders. Its split of Seagram with Diageo has enhanced the share price and level of dividend, and now that the Allied Domecq spoils are being divided, its owners are expecting even better returns.

Which brings us to the case of Aim-listed Urbium, the owner of the Tiger Tiger chain and other metropolitan bars. In the past three months its shares have shot up by more than 50% because investors are expecting a takeover. Earlier in the summer, Regent Inns made an indicative offer of 975p per share but walked away when other bidders appeared. Regent, which was once in talks with the ill-fated SFI, considered 975p a very full price and could not justify a higher offer.

Urbium is said to be evaluating indicative offers of about 10 per share from private equity groups, and one of them, Electra Partners, has made a formal bid in the region of 10.50, valuing Urbium at more than 100 million. That begs the question of why, when Regent Inns cannot find value at above 975p, a financial group, which will undoubtedly sell the business for a healthy return in about three years' time, can. Regent may have got its sums wrong, but so could Electra. After all, the offer is at more than five times Urbium's share price two years ago, and market conditions have not changed that dramatically.

The answer is that both Regent and Electra could have found an answer that is right for them. Regent was probably looking at a single deal. Private finance groups, however, can raise funds more cheaply than public companies and are also willing to take on more debt. Also, Urbium might be just the first of a series of pub-group purchases by Electra. Who knows, it could even be targeting Regent as a second acquisition in a drive to build

a pubs empire whose income stream is fairly secure and which offers the prospect of cost savings as it grows?

On this occasion at least, no shareholders will be losers.