Strange alliance opens a crack in clay firm's future: Pact among three stakeholders may leave WBB vulnerable. David Bowen reports

ONE OF the City's strangest stories is likely to come to a head this week when Schroders, the merchant bank reveals whether it has found a buyer for a 45 per cent shareholding in Watts Blake Bearne, the world's biggest producer of the clay used to make lavatories, tiles and earthenware.

If the stake is sold to a single buyer, the West Country's only quoted company will almost certainly lose its independence - although no one has actually proposed a takeover.

The story starts about 30 million years ago, when a deep fault opened up in swampy south Devon. Material washed into it decomposed into rich layers of ball clay, a malleable substance that turns white when baked. The Watts family, local landowners, started exploiting the clay deposits in the early 18th century.

Mr Blake and Mr Bearne joined them in the 1860s, but it was not until after the Second World War that WBB adopted a scientific approach to developing the clay. This gave it an edge over other producers and the company, having floated in 1964, grew rapidly.

It has since absorbed companies in the US and Germany, has quarries in Thailand and China and is the biggest ball clay company in the world. Its Devon clay is used in 40 per cent of Europe's sanitaryware, and Italian tile makers rely on its German clay.

The seeds of the current problem were sown in 1982, when Ceramic Holdings, controlled by the Lebanese Gargour family, started to build up a shareholding, which reached 23.6 per cent by 1991. Meanwhile, English China Clays had been trying to use its 21 per cent stake to launch a takeover. It was blocked by the Office of Fair Trading, however, and sold the stake in 1989 to two minerals companies, Sibelco of Belgium and Quarzwerke of Germany.

In 1991, Ceramic Holdings, Sibelco and Quarzwerke agreed to act as one shareholder in a 'concert party', holding 45.2 per cent. Under Takeover Panel rules, concert parties can hold more than 30 per cent without having to make a full bid. The three also agreed that if one wanted to sell, all would sell - a way of increasing the value of what would be raised per share.

Last year, Ceramic sold 4.4 per cent of its stake to its partners, giving all three roughly equal shares. Then it dropped its bombshell in January: it wanted to sell out completely. Its two partners could not absorb its share without having to make a bid, so Schroders was asked to find a buyer.

The move has created uncertainty and anger within WBB. 'We've built up a good company. Because of a strange agreement, we've been put into play,' said John Pike, the managing director. He believes Sibelco and Quarzwerke are upset at having to sell their stakes.

The best hope for continued independence is if no bidder emerges. In that case, the Ceramics Holdings stake could be sold in the market and the two other big shareholders would be allowed to keep their holdings.