Squeeze tactics
PORTFOLIO JOHN BULL
Brokers Phillips and Drew, in a recent cir- cular, have pinpointed four of the factors which they believe explain this bear market. There has been some selling of shares to repay overdrafts. Forced rights issues are common. Consumer demand is dull and the high returns now available in the gilt-edged market have attracted some funds away from equities. This is what the severest monetary squeeze in living memory means to Throgmorton Street. You will hear managers of pension funds saying that in present conditions they should be invested 100 per cent in the gilt-edged market—not because they think that interest rates have stopped rising but because equities would have to appreciate by 6 per cent per annum in order to equal the return on gilt-edged securities over, say, twenty years. In fact the long-term growth rate for equities has been about 31 per cent. I say pension funds for such are exempt from paying tax. For the rest of us the calculations are not so clear- cut. Rights issues are coming thick and fast. There is a lot of grumbling about the City's underwriting system but from industry's point of view it has been an unalloyed advantage over the past few months. The underwriters have taken up nearly £200 million of unwanted stock since the begin- ning of the year.
For John Bull, the last seven days in Throgmorton Street have been pretty frus- trating. Unilever and Allied Breweries have decided not to proceed with their merger plans. Scragg's really excellent results made no impact upon the share price (except to prompt a little profit-taking). And BP's plans to acquire control of Standard Oil of Ohio seem to have led to some pretty heavy sell- ing of BP in New York.
I bought my holding in Allied Breweries for my second portfolio just after the announcement that terms were being nego- tiated for a merger with Unilever. At that time the shares were standing at a few pence under 21s. They subsequently moved up to 25s or so as hopes rose that a result was close but before any conclusion could be reached the Board of Trade intervened and referred the proposals to the Mono- polies Commission. Four months later (last week), the answer came through—the two companies could proceed. In the interim, however, the Unilever share price had plunged by nearly 20 per cent while brewery shares had only fallen back by some 4 to 5 per cent. The result was that by the time talks were resumed a few days ago Unilever was selling at around twelve to thirteen times earnings while brewery shares were rated on a seventeen price earn- ings multiple. Thus if Unilever were to offer Allied shareholders nothing but equity, Uni- lever's dividend cover would have deterior- ated quite markedly. The usual solution in these circumstances is to offer a package made up of part equity, part loan stock (possibly convertible into equity). However, high interest rates and the market's poor appetite for big convertible issues made the operation impossible—or so the two sides concluded.
I am bound to say that I am dismayed. Was the desire to merge, so loudly trum- peted to the world at large a few months ago, really not sufficient to get the companies over the purely technical problems I have described? Or did somebody get cold feet? Was it a failure of will or a failure of financial expertise? At all events, I am left with a nasty little loss (about 20 per cent) on my holding in Allied Breweries. I shall, however, hold the shares for the time being. The company is a strong one and in any case vague hopes that in more favourable markets the proposals could be revived might provide some support.
As for Ernest Scragg, the Macclesfield textile machine manufacturer, its half-time results are difficult to fault. Sales were £14 million compared with £51 million in the comparable period of last year. Pre-tax profits have leapt from £1.1 million to £3.51 million. I have said from the beginning that Ernest Scragg's pre-tax profits ride a switch- back course but the present upward trend has lasted longer than usual and should be maintained for some time yet. All the same, some investors have lost their nerve and sold out. They point to the company's very high profit margins (25 per cent) and say that returns like these are vulnerable and bound to stimulate the competition. The Scragg view is that the new model, a specialised texturing machine called the SuperSet, will maintain the group's lead. Moreover Scragg has still not made the big strides in the American market which- it expects. I shall hold the shares in my first portfolio for the time being.
British Petroleum's deal with Standard Oil of Ohio (Sohio) is, I think, a very good one. It mortgages part of the group's Alaskan discoveries (but only a part) in return for a substantial amount of North American marketing expertise and a vehicle for raising the huge amounts of cash which development of Alaska will require. The Wall Street view, however, is that BP has diluted its Alaskan potential and that the company can no longer be considered as an 'exploration' stock. There has been- a big switch into Sohio, which has always been well regarded, though it lacked sufficient supplies of crude oil for its refineries until HP came along. Now there is a danger that the American Justice Department will out- law the merger on anti-trust grounds, which puts both shares under a cloud. BP, though, will bounce back into favour when its recent Alaskan drilling results are known.
Valuation at 9 June 1969 First portfolio £6,337 (details next week) Second portfolio 600 Pillar Holdings at 16s 414 £491 15 Kaiser Steel at £40 4s .. £603 250 Lonrho at 45s 6d .. £569 100 British Petroleum at 138s £690 300 Vosper at I9s 6d .. £292 1.000 Allied Breweries at 17s 3d £863 300 J. Bibby at 28s 9d .. £431 100 Burm-ah Oil at 104s 6d .. £523 Cash in hand .. £915 £5,377 Deduct: expenses £185 Total £5,192
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