EDINBURGH Fund Managers (EFM) has finally entered talks about an agreed takeover by Hermes - ending a two-month stand-off which followed a bad-tempered rejection of the London investment house's initial offer.
One EFM shareholder told The Herald last month that Hermes was planning to bid 575p-a-share this time round - which would value the Scottish fund manager's issued share capital at about (pounds) 163m.
Another investor, however, had indicated it wanted 600p-a-share and claimed Hermes would be making a mistake to offer 575p. Hermes already owns 29.3% of EFM.
Shares in EFM rose 32.5p to 570p yesterday on the news that it and Hermes had buried the hatchet and entered talks.
EFM said in an announcement to the Stock Exchange yesterday: ''The board of Edinburgh Fund Managers confirms that, following an initial approach from Hermes Pensions Management in November 2001, it has received revised proposals from Hermes.
''EFM's board and its advisers are now in discussions with Hermes which may or may not lead to an offer which can be recommended to shareholders.''
With this statement, EFM appears to be making a u-turn on its previous independent stance.
Hermes, which is wholly-owned by and manages the (pounds) 26.5bn BT pension fund, and runs (pounds) 17bn for the Consignia pension scheme and (pounds) 2.5bn for other clients, is not thought to be interested in EFM's stock market listing.
Rather any successful bid would take EFM, which has about (pounds) 7bn of funds under management, off the stock market.
Hermes is, however, committed to retaining EFM's operations in Edinburgh. This would seem necessary to keep EFM clients, including key investment trusts with proud Scottish histories.
EFM employs about 260 people, including those at its back office operation in Dundee.
John Wright, chairman of EFM, said the company was ''now evaluating Hermes' revised proposals'', and added: ''In reaching a conclusion, we will consider carefully not only the interest of shareholders but also our clients and staff whose support is vital to the success of the company.''
Tony Watson, chief executive of Hermes, appeared to signal relationships with EFM had genuinely been mended.
He said: ''We are doing due diligence, which is with the help and co-operation of the EFM board.''
A deal is probably still weeks away, given the need to hammer out details and then consult with EFM clients to ascertain whether they would stay with their manager if Hermes were to buy it.
Watson declined to be drawn on a likely timescale, but said: ''It is not something we want to go on forever. We have agreed with EFM how we are going to approach all this. It really depends on how things go.''
An EFM spokesman said the talks were ''constructive''. The two companies were discussing the ideas in Hermes' revised proposal, and ''fleshing them out''.
It would seem unlikely that Hermes would begin to talk with EFM clients until it has agreed broad terms with the Edinburgh investment house.
Iain Watt, chief executive of EFM, has been maintaining a low-profile since suggesting on November 30 that Watson should leave EFM's board.
EFM is without a chief investment officer, following the abrupt departure of Mike Balfour last October.
Watt and Balfour masterminded EFM's (pounds) 83.25m take-over of Dunedin Fund Managers in 1996, but the investment house has failed to use this deal as a platform for increasing funds significantly.
The Earl of Eglinton and Winton, chairman of EFM's flag-
ship (pounds) 1.39bn Edinburgh Investment Trust, was keeping his cards close to his chest in terms of whether the trust board would be happy to keep its management contract with EFM if it were taken over by Hermes.
He said: ''We don't know what is going to happen. We are sitting back. We are watching things. At the moment, there is no earthly point in saying anything.''
In getting on with due diligence, Hermes has demonstrated beyond doubt that it is determined to buy EFM and that it is not trying to enhance its stake's value by flushing out a higher bid.
Friends Ivory & Sime, which runs some funds from Edinburgh, and First State Investments, which bought Edinburgh-based Stewart Ivory, have been touted as potential rival bidders.
But Hermes' shareholding puts it in a very powerful position.
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