Warburg warning shocks City

SG Warburg, the investment bank, shocked the City again yesterday by warning that 1994 profits would be "very significantly below" expectations.

The statement came less than 24 hours after the troubled investment bank said it was in talks about selling itself to the Swiss Bank Corporation. It is its third profit warning in less than a year.

Analysts reckon Warburg's investment banking operations lost £120m last year, with the group losing £3m overall.

Group losses were cut sharply by Warburg's 75 per cent-owned Mercury Asset Management operations, whose profits last year are expected to be £115m-£120m. Mercury is excluded from Swiss Bank's proposals, and may pursue an independent future or link-up with an overseas buyer, according to sources.

Warburg's profits warning is expected to wipe a significant amount off the price Swiss Bank is prepared to pay for the investment banking operations. City sources suggested a probable price of about £600m, although sources close to Warburg hoped for £750m.

At one time optimists were talbing about £1bn.

The warning drove Warburg's share price down 7p to 814p, and Mercury's down 17p to 844p. Warburg's 1994 results are expected not later than 25 May, according to sources.

Analysts said that the profits warning helped explain the talks with Swiss Bank, a former bitter adversary in several City confrontations, and the extreme pressure on Warburg's chairman, Sir David Scholey, to sell the bank quickly.

The talks are being led by SBC's head of international and financial operations, Marcel Ospel, with close supervision from his chairman, Walter Frehner.

The defection of four top European equity people from Warburg to Deutsche Bank's Morgan Grenfell arm on Tuesday prompted fears among Warburg-watchers that Sir David must seal the Swiss deal within a week to 10 days to avoid a mass staff walk-out, or risk a Morgan Stanley-style fiasco.

A senior investment banker said: "It has now become a race between signing the deal or seeing Deutsche pick off Warburg's best people one by one."

Talks of a counterbidder continued, but analysts put the chances of the Swiss deal going ahead at between 50 and 80 per cent.

Suggested names such as Morgan Stanley and Smith Barney will have to table a big cash offer quickly to forestall the Swiss link-up.

One analyst observed that a counter-bidder would have its work cut out, since it would have to start due diligence work to find out exactly what it was buying.

If it dispensed with such investigations and put a cash bid on the table, it might get "a pig-in-a-poke on a crash diet"

A source close to SBC said yesterday: "The profit warning was not a surprise to SBC. Ten days for sorting out due diligence sounds about right. Both sides are very keen to get this done."

Warburg was put on "rating watch" by IBCA, the credit rating agency, because of the SBC talks. Neither Warburg nor SBC had any comment to make on the IBCA move.

IBCA said that if the Swiss deal went ahead "the implications for the ratings of SG Warburg Group will be positive although it is likely that the holding company will no longer require a rating.

"However, if the deal does not go ahead there will be questions over the future of the Warburg group and, given its poor performance in 1994- 95, it is likely the ratings would be lowered."

Martin Green, of Smith New Court, was one of the most bearish of the analysts, forecasting a £120m loss for the investment bank and a £3m loss overall. "Warburg have faced a squeeze in every direction. They have had to keep their staff sweet, so costs have been kept up. Bonuses have been promised to staff during a bad year. Warburg employs too many people for its revenue. It's on its way out."

Warburg latest victim, page 36