It looks like secateurs at dawn. Tesco on Wednesday appeared to tighten its grip on Dobbies, as the garden centre group it controls announced a vast equity issue that could dilute the stake held by Scottish entrepreneur and rival shareholder Sir Tom Hunter.
The £150m equity issue – larger than Dobbies’ market capitalisation and underwritten by Tesco – is the latest skirmish in a year-long battle by the supermarket group to secure total ownership of Dobbies. Tesco believes the gardening sector will be fast-expanding and should be relatively immune to a consumer slowdown. Dobbies is one of only a few chains in a highly fragmented market dominated by small independent operators.
Tesco, led by Sir Terry Leahy, chief executive, acquired its 65 per cent stake in Dobbies last summer after a bitter takeover tussle with Sir Tom’s West Coast Capital private equity vehicle. WCC, which owns the Wyevale and Blooms of Bressingham garden centre chains, built up a 29.2 per cent stake in Dobbies, continuing to buy shares even after Tesco declared its offer successful. That has left WCC as a thorn in Tesco’s side. Without holding 75 per cent of its equity Tesco is limited in what it can do with Dobbies. It has had to retain a listing, and cannot easily assimilate Dobbies into its own business.
However, if WCC failed to take up the offer of six new shares for every five held, at a price of £12 a share, Tesco would increase its stake to more than 75 per cent. If none of the minority shareholders bought the shares on offer, Tesco’s holding would rise to 83 per cent.
Thus, Sir Tom must decide whether to invest a further £43.5m in Dobbies, or allow his holding to be diluted. Ewan Hunter, no relation of Sir Tom but chief executive of his charitable foundation, said WCC was reviewing the documents and was considering its position.
Tesco said while it had always wanted 100 per cent of Dobbies and still believed it was in the best long-term interest of Dobbies to be fully owned by Tesco, it was mindful of the rights of minority shareholders and Dobbies had given WCC the opportunity to take part in underwriting the issue.
Dobbies also reported a decline in profits for its past financial year, after the wet weather in June and July reversed earlier profit gains. The figures were in line with expectations after a profit warning last August.
The £150m share issue is larger than the group’s market value of £136m, with the shares falling 62½p, or 5 per cent, on Wednesday to close at £12.50. Tesco’s bid was at £15 and WCC paid up to £18.45 for its shares.
James Barnes, chief executive of Dobbies, said the new equity capital would allow Dobbies to repay its £100m of debt, most of which comes from Tesco after a refinancing last autumn, and fund “pretty big expansion plans”. The group spent £30m last year on new stores, and aims to expand from its present 23 outlets to 100 eventually. Last week it paid £8m to buy Sandyholm Garden Centre in Lanarkshire.
Lucy Neville-Rolfe, the chairman of Dobbies, who is also Tesco’s corporate and legal affairs director, said “with a new, strong majority shareholder [Dobbies] will be able to grow in a way that would previously have been beyond its means”.
Mr Barnes said Dobbies was retaining the Tesco loan facility and expected to be back in debt again as expansion continued. It was helpful to have funds available should further acquisition opportunities turn up, he said. Dobbies said last October it would not pay a dividend for 2007 as it wanted to reinvest cash in expansion. The dividend would be reviewed every year, he said.
The group’s pre-tax profits for the year to end October fell 11.8 per cent to £3.8m, although that was after an exceptional £3.1m in fees relating to the takeover, offset by £400,000 of disposal profits and a £1.4m gain on an interest rate swap.
Sales rose 21.4 per cent to £83.5m, with like-for-like sales up 1.4 per cent. In the four months after the year end sales were up 13.4 per cent in total, and 3.1 per cent on a like-for-like basis.