Ten years on from its flotation, Markheath has provided rather more by way of thrills and spills for its shareholders than merely a decent investment return.
Takeovers, backing from discredited Australian conglomerate Adelaide Steamship and chief executive Paul Bobroff’s tangles with Tottenham Hotspur have kept Markheath in the headlines.
But its shares are now at a lowly 29p and the company is boxed in. Too highly borrowed to make ambitious moves on the property front, it is desperately keen to maximise profits from its 13% stake in rival Frogmore, and huge development sites in Stevenage and Chiswick.
The banks, which now effectively run the highly geared Adelaide Steamship, could at any time elect to dump some, or all, of its 69% stake in Markheath on the market.
Paul Bobroff thinks that the Aussies will hold back from cutting their losses. He is confident that deals will emerge within months and that the company’s poor cash flow will improve. But his prospects, right now, are dreary.
Paul Bobroff is the nephew of Bob Bobroff, founder of Essex-based Countryside Properties, now chaired by Alan Cherry. Paul kicked off in the property business as director of his family’s housebuilding companies, which were taken over by Costain in the early 1970s.
He is a short, feisty individual in a permanent hurry to make something of his life. In 1972, at the tender age of 20, he teamed up with the equally ambitious Geoff Springer, 19, to set up Markheath.
By good fortune, Markheath was not too exposed at the time of the 1974-76 crash. It picked up several sites cheaply and began to develop for resale to institutions, while slowly easing back on housebuilding.
Markheath’s first sizeable deal was the sale of a 10,000-sq ft block in Raynes Park to the RTZ pension fund in 1976. As time ticked by, it concentrated efforts on the area around Barnet, north London.
Its distinctive, brick-built developments went down well with prospective tenants. Local property men were sceptical about the position of a sizeable 79,000-sq ft office scheme in Muswell Hill, but Markheath was successful in both letting it to Allied Lyons and selling it on to London Life.
Markheath had the guts to avoid forward-selling schemes to institutions. It preferred to borrow money, typically from Midland Bank or its subsidiary Forward Trust, and sell the buildings at a higher margin later.
The company’s borrowings fluctuated accordingly. To boost its capital base and raise some cash for founders and directors, Messrs Bobroff and Springer launched Markheath on the Unlisted Securities Market in August 1981.
But they were premature in seeking a quote. Markheath was heavily dependent on lumpy development sales to make money. A profits forecast of £1.25m for calendar 1981 assumed that further progress would be made in selling houses on the 15-acre Allum Park Estate in Elstree; the project had been a prop to profits for years.
To persuade investors to take part in a placing, the company had to offer convertible preference shares at 130p, which promised an immediate 15% return.
In the event Markheath made £1.34m profits in 1981. Just four months into 1982, it could boast of rapid progress for schemes in Barnet and Ilford, and sought to become the first USM company to relist on the main market. Paul Bobroff was accused of making the transition with indecent haste, but the USM route enabled him to obtain a quote without selling too many shares on a high yield.
One year on, again, Markheath had achieved sales in Barnet and Ilford, and profits of £1.83m, in line with forecasts. It converted its preferred shares to ordinary ones and issued another £2m-worth to get its gearing down. It began to be treated as a serious player by institutional investors, although it was still stuck on a treadmill of paying higher dividends.
Markheath went on to take an option to buy the Gaumont Cinema site at Tally Ho corner in Finchley from Rank, but has not proceeded with a scheme. Fresh development sales in places such as Watford kept profits moving ahead to £2.07m in 1983, although the directors had to forgo dividend payments to ensure that the company could afford an increased payout to others.
The company was confident that further development sales would push up profits. But it came a cropper with a 51,000-sq ft scheme in Stratford, east London, when a would-be tenant decided to locate elsewhere.
That year profits reversed into losses of £2.4m. The company came up with a £7.3m rights issue in May 1985 to plug a cash-flow hole and bring gearing down from 200% to 50%. Norwich Union signed up to buy the Stratford block on a 6.5% yield, with Markheath agreeing to guarantee rents until tenants could be found. But the rights issue did not have a good reception: 47% was left with underwriters.
Bobroff has no intention of returning to Stratford, despite the decision of the Government to push the Channel Tunnel rail link through the area. He has drawn up a firmly bordered “Markheath triangle” north of London, within which his company can centre research into property opportunities. It includes towns like Basildon. Luton and Brentford near its three corners. “At Stratford we went beyond our traditional area and made a mistake,” says Bobroff.
Markheath became a sudden convert to the idea of retaining developments so that rents could underpin cash flow. It kicked off by announcing its intention to keep a scheme in Finchley. High-income funds ran for cover as Markheath announced that its dividend would be cut from a historic 9.75p to 2.68p in the 15 months to March 1986 to help to pay for the transition.
Profits were on target of £1.4m for those 15 months. But the company was still facing a strain by trying to fund both investment and trading with borrowings. Bobroff began to look for fresh solutions.
With the property and share market going into overdrive in 1987, his advisers were ultimately successful in finding Markheath a marriage partner — Adelaide Steamship.
AdSteam was the creation of John Spalvins, whose mental processes were every bit as complex as the balance sheets of his companies. An Australian immigrant from eastern Europe, he had succeeded in converting a minor shipping company into his country’s third largest industrial group. In 1987 AdSteam’s interests ranged through brewing, wine making and food manufacturing to light industry, shipping and retailing. All these interests were held by a string of loosely knit companies with interlocking minority holdings. Few shareholders understood how the group worked, but few cared because a mixture of genuine growth and creative accounting permitted AdSteam to push up its profits year after year.
AdSteam’s first exercise in Britain was to buy and sell a share stake in cement group Blue Circle.
Spalvins also built up a 26% stake in Coates Brothers, a printing ink company which was family controlled and determined to resist his advances. In May, Spalvins persuaded Bobroff to buy Coates with the £18m which AdSteam used to buy its near-50% stake in Markheath.
Markheath shares rocketed by 39p to 105p on the news. Before rumours of a bid or deal began to circulate, they had been standing at 53p. Bobroff had found an active backer: AdSteam had found an active associate to put more pressure on Coates, at no extra cost. Everyone was happy.
Markheath soon lifted its stake in Coates, and its friends began to drop hints that it wanted more co-operation from Coates. If that was not forthcoming, a hostile bid was possible, they said. But Coates tied up a deal with the French CdF Chimie, agreeing to buy its Lorilleux subsidiary, with CDC taking a 40% stake in Coates.
In early 1988 Markheath sold its share stake for £28m. The Coates’ sale and property deals, lifted Markheath’s revenue to £10.1m in the year to March 1988. Even after the market crash of October 1987, Markheath shares were still trading in line with net assets of 66p.
Then, Spalvins began to deal actively in shares in Royal Insurance and Commercial Union. Markheath bought and sold a stake in motor dealer Caffyns. It went on to search out potential in engineering group Camford, the owner of a valuable development site in Stevenage, and amassed a 6% stake by June 1988. The company also began to build a stake in lowly geared property company Frogmore.
By early 1989 Markheath and AdSteam had taken a joint interest in an office development at Brentford, dubbed Fountains Office Park, eventually let to Smithkline Beecham for £3.7m. The scene was set for a drama in which Markheath would make a bid for Camford (where it now held 24%), whose engineering interests dovetailed with AdSteam’s. “In this case, there really was synergy,” says Bobroff. And Frogmore, in theory, was the next takeover target. Markheath aimed to use its assets as a springboard for Camford’s Stevenage development, which held 16% of Frogmore, with still greater things to follow.
The battle for Camford began to heat up when Markheath used its stake to oppose plans to sell the Stevenage site. Camford reckoned that a price of £20m, possibly £25m, could be achieved; Spalvins and Bobroff believed that Camford could do better. Camford said they were using the issue only as a platform to get boardroom control without making a full bid.
Camford twisted and turned to evade Markheath’s clutches. In early 1990 AdSteam topped up Markheath’s coffers by backing a £45m rights issue, and two months later Bobroff made a hostile bid — valuing Camford at £64m. The move thwarted Camford’s continuing plan to sell Stevenage. “We are not criticising the way they manufacture car parts,” said Bobroff, making it clear that its property management left something to be desired.
The bid battle was a nasty little affair, with Camford questioning the strength of AdSteam’s credit lines and overall gearing, and Markheath throwing dirt at the new service contracts for Camford’s directors. These allowed them to resign and take £3.8m in compensation if or when anyone, such as Markheath, took a stake greater than 30%.
Camford’s directors were quick to waive these entitlements. But the issue was a public relations disaster. And, while some politicians worried about Camford passing into the control of a complex Aussie conglomerate, there was never any chance of the exceptionally dry Trade Secretary, Nicholas Ridley, bothering about that. After Markheath lifted its bid to £69m, and the British Coal pension fund sold a key 4.5% stake, it won the day quite easily. In the fearful stock market of 1990, cash was king.
It was just too bad that Bobroff was following this ambitious strategy at the very moment when he was personally becoming bogged down by affairs at Tottenham Hotspur Football Club.
He and property man Irving Scholar had floated Spurs on the stock market for £3.8m in 1983 in order to repay the club’s extraordinary high debts. The duo had just won control of the club, following a proxy battle. “There really was no alternative to a float, at that time,” says Bobroff. As chairman, he had worked to redevelop Spurs’ training ground, and started an ambitious sports shirts venture.
Bobroff wanted to run Spurs as a business, but, for Scholar, sport — and victory for Spurs in the European Cup — was the thing. When the business end began to go wrong, and the club was forced to contemplate the sale of superstar Paul Gascoigne, their friendship ended. Scholar persuaded the late Robert Maxwell to come up with a £1.1m loan and underwrite a £13.2m rights issue.
The Football League was wary about Maxwell’s involvement in yet another football club. The Stock Exchange was incensed by the lack of disclosure of Scholar’s financial manoeuvres. Bobroff was not kept in touch with the Maxwell financing proposals; he was eventually ousted as chairman in October 1990.
Spalvins also made a serious mistake in taking control of Sir Ron Brierley’s Industrial Equity Ltd, the owner of Woolworths in Australia. The takeover became an acrimonious affair, and a furious Sir Ron published a detailed analysis of AdSteam, which he judged to be “technically insolvent”. Stockbrokers took the hint and studied AdSteam, too. It emerged that the complex corporate structure, lowly geared on a company-by-company basis, actually owed $A7bn. Spalvins, never particularly popular on the Australian wine and cheese circuit, saw the value of his shares plunge. Billions of dollars worth of losses were incurred and Spalvins was forced off the board.
AdSteam is now under the intensive care of its bankers. It is greatly to Bobroff’s credit that, from day one, he “ring fenced” Markheath’s finances to ensure that they would not dovetail with AdSteam’s. It is also fortunate that Bobroff was able to sell Camford’s engineering business to the German Hoesch group for £54m, minus Camford’s potential development sites, which were transferred to Markheath. The latter’s gearing was cut from 120% to 60% at a stroke.
The Hoesch deal was a cracker, leaving Markheath in control of its key Kings Park, Stevenage, site, with the potential to develop 600,000 sq ft of offices in the heart of the town, next to the railway station. Markheath has drawn up detailed plans for 10 modern office buildings around a 4.5-acre square, larger than London’s Berkeley Square.
Sadly, tenants for just about any scheme are hard to come by at present. Including sites at Luton and Bedford, Markheath carries £32m of Camford property in its books and there has to be a question on how quickly these values can be realised. The same is true for a site in Chiswick, earmarked for a 130,000-sq ft scheme to be known as Parkview.
It will also take time for Markheath to unlock its residual 13% stake in Frogmore, where AdSteam has an additional 4%. Following the failure of its £137m bid, Southend Property has sold a separate 10% stake to Regalian, but Regalian is not in a position to move until it sells its key Palace Gardens scheme at Kensington. Markheath has written down the worth of its Frogmore stake to 390p per share, but the current price is just 346p (admittedly against assets of 449p).
In the absence of deals, Markheath has limited room for manoeuvre, with cash flow currently negative. Brokers forecast profits of £3m, following a £4m loss last time (after a £12m Frogmore writedown). A halving of the dividend to 2p is on the cards.
Markheath’s lowly share price of 29p reflects uncertainty about just how much anyone will pay for its assets in the current market. They are carried in the books at 65p. There is great doubt over whether the bankers to AdSteam will unload their 61% stake: the argument against their doing so is that this will crystallise a hefty loss.
Bobroff and Springer are not the kind of people who will find it easy to concede their independence to anyone, though, it seems, they would doubtless prefer to find a more secure holder of 61% than the Aussies.
They have worked long and hard to build up a useful rent roll of £2.9m, and they retain expertise on the development front (albeit for an outlay of £2.4m on administration last year). To improve control at the top, they have recruited Michael Rendle, former managing director of BP, as chairman in place of the luckless John Spalvins.
The next few months will be a severe test of their abilities to negotiate their way out of an impasse.
