Gateway bid launched as buy-out talks break down

agreeing terms for a leveraged buy-out, broke down yesterday afternoon

and this promptly led to the launch of a 195p per share cash offer for

Gateway worth #1735m.

The bid is being made by a specially created company called Isosceles

financed to the tune of #200m of equity by Mercury Asset Management,

Globe Investement Trust, 3i and Murray Johnstone.

On top of this, a group of major banks are putting up #1155m of senior

debt and GE Capital Corporate Finance Group along with Standard

Chartered Bank and 3i Group are putting up #375m of so-called mezzanine

debt facilities. Furthermore, financing is being made available for the

working capital.

The fact that a bid is being made for Gateway, which is one of

Britain's biggest but also one of its least successful food retailing

groups, comes as no surprise. Indeed the lack of surprise, as shownby

the movement in the share price, suggests that there could be work for

the Takeover Panel and the Council of the Stock Exchange.

Just over a year ago, institutional investors rallied round Mr Monk in

sufficient strength to defeat the 220p a share bid launched by Barker &

Dobson.

Seemingly the hope was that Mr Monk would quickly learn his lesson and

change his strategy. But he has soldiered on as before and last year

profits fell from #195m to #186m and the group's broker BZW is only

forecasting #196m for the current year.

So a group of institutional holders have had enough and have

essentially decided that Barker & Dobson had the right idea a year ago.

The immediate plan, if the offer is successful, is to sell 70 to 80

superstores and an agreement has already been drawn up to sell 62 of

these to the Asda Group for #705m in cash. If this goes through it will

make Asda the third biggest group in UK food retailing.

Then the group will set about selling the US company Herman's Sporting

Goods as well as the Medicare business and will then get down to the

business of extracting an acceptable profit out of the core retailing

business which at the moment is at the bottom of the league in terms of

sales per square foot and operating profits.

The new company Isoceles is chaired by Ernest Sharp who in his time

has been a joint managing director of GrandMet and a director of House

of Fraser. Chief exceutive is David Smith a former partner in Arthur

Young and a specialist in corporate restructurings and acquisitions.

Quite clearly Isosceles hopes that Gateway managers will stay aboard

and respond to the incentive schemes that will be made available to

them.

There have already been discussions with Iain Wolsey who could no

longer work with Mr Monk and resigned as marketing director of Gateway

Foodmarkets last August. He in turn introduced Mr Smith to four

disillusioned key members of the Gateway Foodmarkets management --

Robert Willett the marketing director, Richard Quinton the finance

director, Roger Reeson, managing director of Fresh Foods and Peter

Fisher, Corporate Affairs director.

Because of their part in the intrigue and their lack of loyalty these

gentlemen were suspended from their duties yesterday. But if the

Isosceles bid succeeds they are apparently assured of key jobs in the

revamped operation.

The cash offer of 195p is 40% above the low point reached just before

Christmas and just before the January surge of speculative buying of

Gateway shares. It is also 18% above the average for the month of March

and 10% above last Friday's price.

Moreover, the fact that the Gateway price only rose by a further

21!/;1/p to 1871!/;1/p in late dealings yesterday suggests that the

market has no great expectations that someone is going to come in with a

higher bid.

But it also suggests no great conviction that this consortium bid will

win the day. Although key members of his senior management team have

behaved with extreme disloyalty, Alec Monk who was consulting with his

merchant bankers Morgan Grenfell and Lazards is not dead in the water

yet.

The institutions who have got together to plan this enterprise only

own 4.4% of the issued capital. This pales in comparison with the 15%

owned by AB Foods who received their shares as part consideration when

they sold their Finefare chain to Alec Monk. The consortium said

yesterday that it has not discussed the matter with AB Foods and AB

Foods was not prepraed to offer any comment on the situation last night.

Observers were left to conclude yesterday that price was the major

factor in the breakdown of the talks between Alec Monk and the

consortium. On Monday the group stated that 195p a share was derisory

and group finance director Alan Perleman used the word again yesterday.

He said: ''We said that when they first started to talk about it and

we say it again. It is not a sufficient price to win the day''. He also

said that the four suspended Foodmarkets directors had notifid chief

executive Louis Sherwood of their involvement on Monday and were told to

leave the building immediately. Mr Perleman, who desribed their action

as ''not a satisfactory way of repaying trust'' said ''we are

considering our position. They might carry valuable information''.

However, although Isosceles said last night that it will be quite

happy to renew the discussisons with Mr Monk, it was anxious to give the

impression that the price was not negotiable. But it would say that,

wouldn't it.

When the formal offer comes out it will offer shareholders the

alternative of taking part of their consideration in a Convertible

Redeemable loan note which will give shareholders the opportunity to

retain a stake in Isoceles when it is returned to the public forum in

three to five years after the restructuring has been completed.