Not all corporate marriages are made in heaven. In the case of Wright Oliphant and Brookmount, problems surfaced even before the original deal was put to shareholders. The initial price was £13.5m, funded by a share issue. Wright Oliphant’s principals got £5.1m in cash, £3.54m in shares, and two further profit-based tranches of convertible shares worth a maximum of £4.86m total. This valued the firm — three directors, four executives and six other employees — at 13.5 times its earnings.
But, in addition, Wright Oliphant would earn further cash payments if it bettered specified profit levels (£1.5m, £1.75m and £2m) over the following three years. These would be based on a formula of £8.775 for every £1 excess and, amazingly, Brookmount’s commitment was unlimited.
Given WO’s profit record, this was a rash promise. The deal was renegotiated to include a cap of £12m on these performance payments, hiking the potential cost of WO to £25.5m. In addition, the required profit levels were revised upwards and performance-related fees excluded from the calculations.
Even with these adjustments, WO’s effect on Brookmount’s books is not a happy one: last year, WO’s payment for its 1987 performance was £3.5m; against that, Brookmount’s total pre-tax profits for 1988 were £11.5m. This year WO is collecting the £6.5m balance.
“Brookmount had been on the market nine months and had talked to umpteen people,” says one observer. “Wright Oliphant are a major factor why people pulled back.”
Sellar, however, was prepared to take it on. “WO was not a stumbling block, though it could have been,” says Middleton. “The value gave us concern. Brookmount paid a very full value; we would not have been happy to pay that. We marked it down substantially accordingly.”
The convertible shares held by WO’s three directors also posed a potential problem for FSM — “any one could have made it difficult,” notes Middleton.
“It is the kind of asset that can prove to be a poison pill under certain circumstances.”
