Lombard: A profitable game of poker with Carl Icahn

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T&N administrator helps UK creditors

Playing poker with Carl Icahn, the legendary US corporate raider, is not for the faint-hearted, particularly when the game is as complex as the restructuring of Turner Newall, the vehicle parts company, and its US parent, Federal-Mogul.

That has been the task facing Simon Freakley of Kroll, the joint UK administrator of T&N, since Federal-Mogul went into Chapter 11 bankruptcy protection in 2001 because of asbestos liabilities and a restructuring scheme emerged that would give Mr Icahn, an unsecured US creditor, half the US company. UK creditors – notably the pension fund, with an £875m buy-out deficit – would have had a pretty raw deal.

The UK administrators dug in their heels and – after years of complex negotiations – yesterday announced the outlines of an agreement that represents very considerable progress for UK creditors. And this even though Federal Mogul has been the only realistic buyer of T&N.

The US company will take ownership of the UK business in return for creditors getting a cash dividend of £375m. Of that, about £250m is expected to go to the pension fund, compared with little more than £60m originally proposed. Importantly, US asbestos claims against the UK company will be settled as part of the US reorganisation process, removing a large point of potential dispute.

All this should clear the way for the pension scheme to be taken under the government’s new Pension Protection Fund – though the protection is only partial: T&N scheme members will lose about 25 per cent of the net present value of their pensions.

The improved deal means T&N will not be as big a burden on the PPF as originally feared. In a note for RBC Capital Markets, John Ralfe, the independent pension consultant, reckons the loss to the fund will only be about £125m.

Still, add that to other PPF losses since it was set up in April – such as MG Rover and Heath Lambert – and the total so far is about £600m. When the government first mooted the PPF it suggested the annual levy on UK businesses would be about £300m. The PPF will shortly put forward its own figure to ministers. This ought to be far more than £300m – and the PPF needs to be honest enough to say so.

Pilkington’s destiny

BTR’s failed hostile bid for Pilkington in the 1980s was a classic and investors still tend to get more excited by takeover talk than by trading.

On Monday last week the shares rose 5 per cent to a 12-month high on renewed speculation that Nippon Sheet Glass, its 20 per cent shareholder, would buy the group. Yesterday, they slipped 3¾p to 140¼p after the world’s second-biggest glassmaker said pre-tax profit would be up more than 20 per cent for the six months to end-September.

Bid talk appears based on little more than some investors closing their eyes and wishing very hard. NSG has had its stake for several years. It might increase its shareholding, but a full-blown bid would seem financially stretching for the Japanese group whose market value is less than two-thirds that of Pilkington. Equally, the presence of NSG might deter another possible trade buyer.

The share’s response to the trading news looks more justified. The profit increase owes something to timing. More fundamentally, it is driven by cost-savings and comes despite market conditions, not because of them.

Analysts’ full-year forecasts are generally unchanged and put the stock on a price/earnings multiple of 14 to 15 times. This looks pretty full.

The group is now moving into the growth phase of its three-stage strategy, so Stuart Chambers, chief executive, and his team deserve credit for delivering a turnround on schedule.

For the immediate future, Pilkington’s destiny is probably in its own hands. This makes a less interesting story, but one more likely to have a happy ending.

Gala’s flutter

Gala would make a particularly good fit with Coral Eurobet, as Lombard pointed out only last month. So it should come as no great surprise to learn that it is in talks to buy the bookmaker, also being groomed for flotation by Charterhouse, the private equity group.

Gala, also owned by private equity houses, is the UK’s largest bingo operator, with significant casino operations, but no presence in bookmaking. Coral is Britain’s third biggest bookmaker after Ladbrokes and William Hill, and should have less competition issues than these rivals in further sector consolidation.

Gala, moreover, is seen as one of the sector’s consolidators as the government’s gambling reforms kick in, offering the prospect of a betting bonanza. It recently abandoned its own thoughts of a flotation in favour of new investment from an additional private equity owner, Permira.

Coral, which may be subject to other approaches, has not yet abandoned its flotation. But recent history suggests that private equity houses, with their stronger appetite for leverage than the quoted sector, usually win these twin-track contests – and the prospective synergies in this deal are an added advantage to the Gala team.

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