A dash for growth in the 1980s has left John Whittaker’s Peel Holdings looking over-stretched as it, like so many other property concerns, faces up to austerity in the 1990s.
To avoid a breach of banking covenants, Whittaker has injected personal assets into Peel, including a controlling stake in the Manchester Ship Canal Co. The company is selling completed developments and assets as fast as the market can bear.
Major shareholder British Steel pension fund was not happy with the MSC deal, arguing that a rights issue would have been better.
However, says managing director Peter Scott, the market will eventually recognise just how cheaply Peel has obtained control of MSC and its 6,000 acres of land — part of which could well become the site of Manchester’s answer to the Metro Centre.
John Whittaker is a shy entrepreneur who prefers to leave Scott, deputy chairman Robert Hough and MSC’s Martin Hill to manage the day-to-day running of the business. He has made himself unavailable, even to brokers and journalists who known him well.
Like Sir Ron Brierley of New Zealand, who had a similar shock when his empire was wounded by the stock market crash, Whittaker has realised that his skills are best suited to dictating strategy (in his case from the Isle of Man) rather than hands-on organisation: “Not that you’ll stop him from getting on the phone the whole time,” says Hough, his long-standing legal adviser.
Since his days as a rugby skipper. Whittaker has been used to leading from the front. He is a rough diamond of forthright views: a complex character who knows the value of money, and mixes more easily with farmers who bring him land deals than City pinstripes.
Whittaker started out in the quarrying business. He made his first fortune by selling gravel for the construction of the M62 trans-Pennine motorway. Later, he bought up disused textile mills around Manchester, refurbishing them and helping out on labouring work as necessary.
Sometimes he took control of small, quoted textile companies who owned the mills, selling the vehicle to a rival entrepreneur. One such company became the shell for Ron Shuck’s late Espley Trust.
In the early days, Whittaker routed much of his business activities through a tax-efficient Isle of Man company called Largs, controlled by his parents. Largs bought a housebuilding company in 1976, but mainly devoted itself to the purchase of textile companies such as John Bright and Highams.
As Whittaker learned more about the ways of the City, he decided to ask it for support. He retained control of a quoted shell company called Peel Holdings, after converting its 400,000-sq ft mill at Bury into industrial premises. Then he sold potential industrial space, owned by Largs and others, into Peel in return for shares.
Whittaker’s success was in buying assets from landowners at attractive prices and reselling them at attractive prices to Peel. His boyish enthusiasm for everything in Lancashire, and Peel Holdings in particular, was infectious: Whittaker drove people from the City around his empire at a furious rate — right up to the very edge of Peel’s quarry walls. Few brokers forgot the experience.
He was always keen to find new ways to make the best of his land assets. Whittaker tried, and failed, to convert Oxford Mill at Rochdale into an ice rink and, bit by bit, won permission to build houses on his farmland.
Whittaker became particularly excited when he discovered just how much money Peel could make by converting land on the edge of Bury, at Angouleme Way, into superstores. And in March 1982 developers Tom Dootson and Peter Jevans agreed that Peel should buy control of their Abbeygate development company. Soon Abbeygate was processing eight schemes in locations as far apart as Dundee and Larkfield, Kent, and had plans for 25 other stores.
Dootson was the quiet, hands-on member of the Abbeygate partnership. Jevans, in contrast, was the extrovert who knew key decision-makers in the retail business.
Anyone who met Jevans would have been forgiven for thinking that he owned Peel. He toured the City, and made speeches, to explain the company’s strategy of tying up prelets on sites before putting in planning applications; the company then persuaded planners that bulk shopping generated valuable local employment opportunities.
Peel was in the right place, at the right time. Its skills at winning planning permissions in the North West, and elsewhere, meant that it was in a better position to offer retailers the space which they needed.
It kept its edge over smaller rivals such as (now collapsed) Citygrove with the help of sound financing put in place by Whittaker. Peel’s industrial estates acted as “cash cows” for the rest of the operation and the City applauded the company’s ability to keep control of its schemes, without recourse to the institutional funding market. But not everyone remained happy with Whittaker’s habit of injecting his family’s private interests into the company in exchange for shares.
In 1984 Peel expanded its development land bank in the North West by buying quoted agricultural group Bridgewater — 25% owned by Largs. Whittaker also injected further industrial property from Largs into Peel.
Whittaker was able to square both the City and the press on this deal, which both kept his control of Peel tight and strengthened its cash flow. But Jevans was not convinced that his superstore development programme would be best served by the purchase of Largs’ assets: he was keen to push Peel into areas such as hotel and leisure development before Whittaker was ready to entertain these ideas.
Relations between Whittaker and Jevans deteriorated, and Jevans and Dooston left the company in 1986. Jevans went on to put some of his bright ideas to work at a small quoted company called Merlin International, backed by offshore financiers Dursley and Brian Stott.
But hard work and booming values for its superstore developments ensured that Peel kept its reputation as one of Britain’s leading superstore developers after the departure of Jevans.
In the mid-1980s Whittaker struggled to get personal control of the quoted Manchester Ship Canal Co.
Controlled in part by Manchester city councillors, the company’s business was keeping Manchester’s canal dredged to prevent it from flooding the town. The voting structure of its shares, weighted towards small local shareholders protected its management from predators.
But there was a hidden goldmine in 6,000 acres of derelict land owned by MSC — in particular, 300 acres at Dumplington, which lie near the junction of the M61, M62 and M63. Whittaker had visions of developing the site as a huge shopping centre, plus a stadium to support Manchester’s bid for the Olympic Games.
Whittaker proposed a joint development with MSC bosses Don Redford and Jeremy Weston who happened to be on Peel’s board.
They rejected the idea, arguing that MSC would bring forward its own scheme. But Whittaker does not like being crossed, and so sounded out merchant bankers Rothschild and Warburg on likely City attitudes towards a bid by Peel Holdings.
The bankers were not impressed, arguing that it ill-suited Peel’s image as a retail developer to plunge into the minefield of Mancunian politics. In any case, MSC’s share structure made it practically invulnerable to takeover.
Whittaker demurred, but he decided to risk his reputation by pursuing a bid for MSC using his own money. He bought 52% of the shares from discontented institutions (giving 32% voting control) and launched a £37m bid for MSC in summer 1986.
The bid was bitterly contested. City blue-blood Nicholas Berry was brought in as chairman to help with the defence. MSC even complained to the Department of Trade and Industry about Peel’s tactics in soliciting proxies, but to no avail. But, by 1988, Whittaker was in control, relegating Berry and a handful of institutional shareholders to the sidelines. Manchester City Council’s representation on the board is now minimal, and the Whittaker camp has 68% control.
Meanwhile, Whittaker was keeping Peel on the growth track, relying heavily for support on his lieutenants Robert Hough and Peter Scott, and development director Hermann Jungmayr. By the late 1980s it had embarked on a mighty development programme: golf course construction (near Worsley Park in Manchester); the redevelopment of Blackpool Airport; town-centre office refurbishment; Australian retail schemes; and the provision of a 400,000-sq ft retail centre near Torremolinos in Spain. Along the way the Saudi Arabian Olayan family acquired a sizeable stake by agreeing to sell development assets to the group, and went on to buy more shares.
In a bid to develop a base in the South East, Whittaker decided to take a tilt at London Shop, the venerable retail property concern founded by Sir Cyril Black. In late 1988 Peel paid £36m to the British Steel Pension Fund for its 20% share stake. Peel went on to launch a £282m bid for London Shop.
Berish Berger, boss of the late Land & Property Trust, considered mounting a rival bid, but gave up the idea when Whittaker raised Peel’s offer to £304m. Peel won control, backed by a rights issue and £250m of loans arranged by bankers Warburg. The rents from London Shop did not cover the costs of finance at the outset.
In March 1989 pre-tax profits soared to £20.2m. But this was after including a £6m profit from the sale of fixed assets. It also excluded £9.2m in capitalised interest.
Six months after taking over London Shop in June 1989, Whittaker realised that the market was heading South, and that Peel was heavily over-committed on its development programme.
The company was lucky to have just signed a 10% debenture to raise £100m. It withdrew from a development in Castleford, and sold schemes at Mill Hill and Bracknell to institutions. The brakes were put on new development signings. Property was knocked out of London Shop at a rapid rate and house building interests were spun off in management buy-outs. The Australian interests were sold to Peel’s local partner.
At its peak, Peel’s gross assets were £716m. Stopping the company in its tracks shocked the staff, and three surveyors resigned immediately. In due course, development chief Hermann Jungmayr decided it was time to quit.
Painful though it was for John Whittaker to lose staff and sell assets at a knock-down price, he was realistic about the need to do so.
Towards the end of last year, Peel had agreed £180m in asset sales, no less than £100m of which were London Shop properties. Hough accepts that Peel bought London Shop at the top of the market, but argues that the attendant rights issue, and the sale of a string of its smaller assets, has helped to support the group. “I believe that, without the purchase of London Shop, this group would now be in a worse state,” he says.
That said, Peel was in trouble from September 1990. “We kept selling at around book value until then,” said Scott. “When we came back from our August break, we discovered that people were putting in offers at only 10% or 15% below book asset value. We realised that if we projected forward that kind of performance, we were in danger of breaking our banking covenants.”
The risk related to £250m of City finance taken out for the London Shop bid: covenants required Peel to maintain net assets at £300m, gearing no higher than 125% and a decent income stream. Income was not a problem, but Peel’s directors estimated that their properties had lost £100m in value by the beginning of this year.
Warburg and Peel pondered a rights issue. But Whittaker, owner of roughly 47% of the company through Largs, was not keen on diluting his stake. Nor could he afford to take up a rights issue in full. The Olayans, owners of 21% of the stock, took the same view and were preoccupied with the Gulf crisis.
Instead Whittaker decided to sell Largs to Peel in return for cash and shares (which gave him a slightly larger stake). Through the deal, Peel would become the owner of 68% of Manchester Ship Canal (with net assets totalling £124m) plus £26m of potential tax losses: its capital base would be greatly increased. The initial consideration was £58.5m in cash, shares and convertible preference stock: but Peel pays an additional £22.7m to Whittaker’s family, when banking covenants permit, from April 1992 onwards.
The deal did Whittaker’s own finances no harm. Peel stood to be in the unusual position of owning its own shares (held by Largs) rather than cancelling them, because it did not want to renegotiate loan arrangements with recalcitrant bankers. Peel’s net assets come out at £360m. Gearing is 108%, before counting substantial non-banking creditors.
British Steel pension fund, owners of 14% of Peel’s shares, voted against the Largs deal in a recent meeting of shareholders, arguing that a rescue rights issue would have been a better way to reduce the company’s gearing. But the deal was approved by other shareholders.
The company will continue to sell assets to reduce its borrowings further. And Peel detects signs that yields on superstores are stabilising at around 10%, following a fall of a third in value since the peak of the boom. Rental voids in the portfolio are nearly 5%, partly as a result of the collapse of Lowndes Queensway, or 9% including unlet developments.
After a two-year planning battle, Peel is submitting final proposals to the Department of the Environment to redevelop the Dumplington site into a shopping centre.
It hopes for early permission so that a huge surplus site value can be crystallised. The Nicholas Berry camp may or may not agree to a bid for their minority holdings at this point, pending the choice of a funding partner for the scheme.
Hough points out that a shopping centre at Dumplington would still leave 175 acres at the site suitable for other uses — including an Olympic Games centre if (by any chance) Manchester wins the franchise for the year 2000 — plus 80 acres across the canal. The MSC retains vast tracts of land elsewhere, including an impressive waterside development at Salford Quays. It has a residual interest in a rubbish tip recently sold for £20m, against a book value of £8m, and a 10% stake in the Mersey Docks & Harbour Co.
Peel’s shares, at 115p, are at a thumping 60% discount to net assets of 292p. The market may well be taking too gloomy a view, given Peel’s residual strengths. But uncertainty over British Steel’s holding clouds the picture; Whittaker is an elusive individual, and Peel’s gearing remains too high. Peel should survive and (eventually) prosper, but it is a bit early to buy the shares for recovery.
