Beleaguered Electra Rebuffs 3i’s Offer

The future of Electra Investment Trust (EIT) and its management company Electra Fleming, remained unresolved at press time. EIT is effectively “in play” following an unsolicited offer in January from 3i, the UK’s largest private equity group. EIT, a victim of the substantial discounts that have bedevilled the UK investment trust sector in recent years, rejected 3i’s indicative offer of 705p per share, which valued the trust at GBP1.2 billion (euro 1.75 billion) and, at a mid-February shareholder meeting, revealed a counter-proposal that could wind up the trust within five years. EIT chairman Michael Stoddart proposed a buyback of 40% of EIT’s shares at a price reflecting EIT’s net asset value on 28 February, after which EIT would cease making new investments and realise its existing assets, returning proceeds to shareholders. The proposed tender offer would be funded by GBP750 million of debt from National Westminster Bank and JP Morgan.

EIT’s institutional shareholders were unenthusiastic about the wind-up plan, with some expressing doubt that the scheme could succeed in narrowing EIT’s discount to net asset value to an acceptable degree. Other observers questioned the wisdom of applying additional gearing to a portfolio comprised largely of leveraged investments. Shareholders’ reported preference is for sale of the trust to 3i or another bidder at a price above 700p per share. Following the announcement of the wind-up proposal, EIT’s share price increased to 685p from 674.5p. Other potential bidders have approached EIT, but no firm counterbid has yet been tabled.

3i, meanwhile, confirmed that it “remains interested in acquiring Electra or its assets”, and sources close to the firm say that it has not yet ruled out a hostile bid.

EIT has traded at an average 17% discount to net asset value (NAV) in recent months, while 3i shares command a similar premium. EIT’s NAV stood at 676p per share at its September year end, based in part on very conservative directors’ valuations of unquoted holdings; more recent estimates put EIT’s net asset value at around 730p per share or more, a figure 3i dismissed as too high. EIT has mandated PricewaterhouseCoopers to audit the trust’s current NAV.

Electra Fleming is a joint venture between EIT and the investment bank Robert Fleming; EIT’s 50% holding in Electra Fleming, valued at GBP31 million, is the trust’s fourth largest investment.

When 3i first approached EIT, the group aimed to acquire both the trust and the management company. Electra Fleming executives, however, were reportedly unwilling to move to 3i – not least because of considerable discrepancies in the remuneration structures of Electra Fleming, which operates a coinvestment scheme, and 3i, which does not.

The consensus among industry observers, meanwhile, is that 3i is more concerned to add EIT’s assets than the management company. A sucessful bid for EIT would boost 3i’s assets to around GBP4.5 billion, thus ensuring the group’s continuing membership of the FTSE-100 for the foreseeable future. The addition of EIT’s portfolio would also broaden 3i’s exposure to larger UK and Continental European companies, which have been EIT’s principal focus; 3i, by contrast, has concentrated principally on smaller and mid-market investments. Electra Fleming also has a US presence, whereas 3i has progressively divested its US assets in recent years.

Without the Electra Fleming management team, the projected acqusition would basically be as asset-building exercise for 3i. If 3i should succeed in agreeing terms with the Elecra Fleming executives, the group would extend its already considerable presence in Continental Europe and increase the resources it can bring to bear on larger deals. It is moot whether 3i’s shareholders will agree that this additional resource would bring sufficient benefits to justify the increased expenses such a course would incur.

Meanwhile, Electra Fleming has confirmed that it has entered into discussions with the US buyout group Clayton, Dubilier & Rice, which may be interested in acquiring the management company but does not intend to buy EIT’s assets. Clayton, Dubilier, which set up a London-based European private equity operation last year, and Electra are well known to each other, and EIT is an investor in Clayton, Dubilier funds. Electra Fleming described the talks with Clayton, Dubilier as “inconclusive”; however, were Clayton, Dubilier to win Electra Fleming, it would gain a significant competitive advantage over other recent US entrants to the European market in the shape of a ready-made and experienced international network covering France, Germany, Italy and Spain as well as the UK.

In any event, given the difficulties some recent entrants to the European private equity market are experiencing as they try to staff their European operations, the Electra Fleming team can be fairly confident of finding new homes elsewhere if they do not choose to raise their own standalone fund.