27 DECEMBER 1968, Page 26

Logic as it ain't


One set of shareholders will be spending the Christmas holiday thinking hard about its present situation, prospects and responsibilities. I refer to shareholders in News of the World Organisation, who are due to vote on their board's projected deal with the Australian publishing group run by Mr Rupert Murdoch, of News Limited, on 2 January. As all the world knows by now, the News Limited deal is supposed to provide a satisfactory alternative to Mr Robert Maxwell's bid for the company through Pergamon Press.

Rather than rehearse the involved history of the dispute, I hope that some comment on Pergamon's latest circular to NOW shareholders, a document of unparalleled hostility, will be helpful. There is, first of all, the question of `industrial logic.' I am inclined to think that shareholders should ignore the arguments under this head, not because they are unim- portant, but because the two sides take irre- concilable views on the subject. No outsider can hope to judge which is right. In any case, the whole idea of 'industrial logic' has been systematically devalued this year as one, mer- chant bank after another has put up a phoney version of 'industrial logic' as support for or defence against a takeover bid. Hill, Samuel and Robert Fleming, Pergamon's two mer- chant bank advisers, write that 'there can be

no industrial logic in the proposed merger of two newspaper publishing groups whose activi- ties are separated by over 12,000 miles.' Pos- sibly not, but, in principle, the addition of Australian publishing assets to a British news- paper group is an attractive development, providing sensible diversification and a stake in a faster developing economy than our own.

Under the heading of financial considera- tions we get rather more compelling criticism. Pergamon's bankers say—'in exchange for 12 per cent of News's assets, contributing approxi- mately 29 per cent of News's profits, your board now proposes to issue ordinary shares of NOW valued, by reference to the Pergamon offer, at £12.5 million.'

Although assets are worth what they earn, not what they cost, it does look as if Mr Murdoch has pulled off something of a coup. He is injecting into News of the World assets valued in Australia at, say, £6 million, in ex- change for NOW shares worth approaching £12 million. The bankers also devote considerable attention to the terms of Mr Murdoch's guarantee of 1969 profits, which, they say, is illusory because only one year's profits are warranted. Mr Murdoch would reply that he offered the guarantee because his rate of profits increase is so startling that he felt the guarantee was needed to add credibility.

My own reasoning and advice to share- holders runs along somewhat different lines. Shareholders should concentrate upon the price of their shares. Under the Pergamon offer shareholders stand to receive at least 47s 7d a share for voting equity, more likely 50s a share given reasonable buoyancy in the Pergamon share price. Taking together the News of the World's forecasts and the terms of the News Limited deal, what price will NOW sell at with- out Mr Maxwell's bid? The NOW board has forecast a rise in next-year profits from £2.8 million to £3.45 million. The forecast is couched in the most general terms, and is,

even allowing for the fact that Mr Murdoch will be in charge, not absolutely credible. So if, for safety, one takes a slightly smaller profit, figure for 1969, and adds in News Limited", guaranteed profits, and multiplies the whole by the appropriate price/earnings ratio—say seventeen—then the answer lies in the 35s to 40s range. On that count, there can be no doubt that Now shareholders should accept Mr Maxwell's offer, and those who don't feel in- clined to do so for personal reasons, should consider whether they are not in effect frus- trating the best interests of their fellow shareholders.

My two portfolios have survived the past week quite unscathed by events. About prospects for 1969 I shall write next week.

Valuations at 23 December 1968 First portfolio £6,861 (details next week). Second portfolio

600 Pillar Holdings at 16s 50 15 Kaiser Steel at £36 8s .. 250 Lonrho at 43s 100 British Petroleum at 140s 9d 300 Vosper at 23s 74d 1,000 Allied Breweries at 226 6d Cash in hand £5,675

Deduct: expenses £163

Total £5,512 .. £493 .. £546 .. £537 .. £704 £354 .. £1,125 .. £1,916