Signs of recovery at Cordiant

INVESTMENT COLUMN

When the terms of a rights issue cause a rise in the company's share price, you can assume that the cash call has been priced to succeed. The market liked the look of Cordiant's pounds 127m one-for-one rights issue, pitched at 60p a share. The stock rose 8p to 92p on news of the issue yesterday, to the relief of Cordiant's management.

If successful, the issue will allow Cordiant more or less to wipe out its borrowings. Moreover, a restructuring of debt facilities gives Cordiant far better terms for future credit: only 1.5 percentage points over Libor, rather than the current three.

In exchange Cordiant is making some extravagant promises: that revenues will grow by at least as much as those in its peer group (integrated, global advertising companies) and that profit margins will improve markedly, rising to "double digits" in the course of 1998.

One can assume that such margins are within reach: other companies (witness WPP) are on their way there already; moreover, the advertising market is improving, and most analysts expect an even better 1996, in both the US and Britain, thanks to likely monetary loosening in the lead-up to elections and a rise in consumer confidence and ad spend.

The question is: can Cordiant, dogged with high-profile problems of recent months (founder Maurice Saatchi's departure, the defection of key ad accounts such as Dixons, Mars and British Airways, restructuring costs of pounds 50m this year) really ride the recovery?

If not, investors might want to think twice about subscribing to the rights issue. But if the new management changes, financial restructuring and a steady slew of new business over the past few months are enough to convince the doubters, then a 60p price at which to top up holdings will probably look a bargain-basement entry level in a few months.

So how good is current management? Certainly, Bob Seelert has convinced many at Cordiant that he has the contacts in the US (the company's main market) to improve business prospects there. A background in consumer products is helpful for anyone trying to woo ad clients. Secondly, many have been impressed by Mr Seelert's promise to exchange all his net proceeds from a $160,000 bonus into Cordiant shares. That would be an expensive gesture if he didn't feel confident.

The corner may well have been turned. Profits might be as high as pounds 43m in 1996, after the current year's pounds 5m (decimated by write-offs for the restructuring). Earnings per share in 1996 of 5.3p a share would put the shares on 17 times next year's earnings. That's not cheap but Cordiant has all the signs of a good recovery stock.

Casuals bid

stays at 140p

The bid for Country Casuals entered its final phase yesterday after former chairman John Shannon said he would not increase his 140p a share offer "in any circumstances". His unusual statement means he cannot make a higher offer for the women's clothes retailer even if a white knight should now emerge. In the absence of another bidder, shareholders now have as much information as they are going to get.

At first sight, Mr Shannon is offering a welcome escape from what has proved a dud investment since its flotation at 130p just over three years ago. A profits warning in September last year sent the shares to 82p at one stage, halving Country Casuals' market capitalisation, and prompted Mr Shannon's departure.

If the bid now fails, the shares are likely to fall back nearer to the 114p at which they stood before Mr Shannon's interest became known early last month. However, there is weight to the management's arguments that the performance of the company has improved since it parted company with Mr Shannon.

Many of the company's problems have stemmed from diversifications into formats for younger and larger women made while he was in charge. The former business has now been sold and stripping out losses at the latter, the Elvi outsize format being retained, would leave underlying profits of perhaps pounds 3.5m. If successful, Mr Shannon would therefore be picking up the core Country Casuals and Lerose manufacturing operations on a p/e of around 11.

Thus far, Mr Shannon's bid vehicle, Ciro Holdings, has won acceptances from 34 per cent of Country Casual's shareholders. Excluding his own 18.8 per cent holding and the 13.3 per cent of PDFM, the fund managers with whom he is acting, that represents acceptance by only 1.9 per cent of the formerly uncommitted shareholders.

The bid is hardly generous, but the outcome could be close given that institutions may not have sufficient faith in the remaining management to stay aboard. Holders wishing to take no chances should sell in the market.