Strengthened Strong bids for still weak Garnar
Leather companies inhabit one of the sleepiest corners of the stockmarket. Perceived as old players in an ancient and notoriously cyclical industry, the three remaining listed companies trade on very modest ratings and share price movements, after the recovery from the recession, have been undramatic.
But one of the three, Strong & Fisher, painted a different picture last week when outlining its £19m bid for fellow tanner, Garnar Booth. According to Mr Richard Strong, the eponymous chairman, leather companies in the eighties were forced to make a choice.
Either they could stick to traditional products - shoes, handbags, diaries, chamois - competing with products from developing countries and riding out the fluctuations in skin prices and consumer demand that have caused the industry's reputation for cyclicality. Or they could pick an upmarket niche, where demand was more reliable and competition less fierce.
Needless to say, Strong chose the latter route, moving into specialised high fashion leathers. By contrast Mr Strong believes that Garnar has not adapted fast enough. Hence his offer for the company. The terms are one for two plus 242p in cash. With Strong at 148p, that values Garnar at 195p, compared to 196p in the market.
The rationale is that Garnar, with links to abattoirs in the north of England and a successful international skin trading operation, would bring Strong more of the high quality lambskins that it needs. Also Garnar's two lambskin tanneries (for treating cleaned skins) could be adapted to Strong's better quality processes to the benefit of profit margins. The other tanneries, the core of Garnar's business, Strong will need to look at before making a decision about what to do with them.
Mr Strong's view of the leather industry is certainly supported by its recent history. There was a wholesale rationalisation of UK tanneries when imports clobbered the British shoe industry in the seventies. Then, at the turn of the decade, a high pound, weak home demand and a catastrophic collapse in hide prices plunged all the listed companies into loss.
Strong's response was to change direction. Only a year or two belatedly, it started to make very soft, thin lambskin leather, drum dyed instead of spray fnished to give the sort of natural look required of high fashion leathers. From nowhere in 1982, these now account for 80-90 per cent of sales, and demand, Mr Strong says, is "exploding".
Garnar's approach was different. In 1981, at the depth of the recession, it bought fellow tanner Booth International, creating a group with a broad collection of traditional leather activities. Garnar was big in chamois and in "skivvers" - the upper half of sheepskin after the chamois had been removed - used in handbags and shoe linings, among other things. Booth bought some bovine tanneries, as well as two of Strong's targets - the international skin broker and the lambskin tanneries. (Pittard, the other listed company, moved into leather for water resistant gloves and boots, and high quality bovines for shoes).
By spreading its interests widely, Garnar aimed to make it less vulnerable to the external factors that traditionally affect leather sales. But Garnar's recent results show that its strategy has not been wholly effective.
Pre-tax profits almost halved to £2.52m in the year to January. While skivvers remained buoyant, sterling's strength narrowed margins on chamois sales to the US and bovine leathers were disappointing - the result of volatile hide prices and unexciting UK shoe production.
Not that Strong's latest results were much to write home about. Profits before tax advanced only 6 per cent to £4.47m in the year to June, and earnings of 21.7p were 2p lower after a return to a normal tax charge. Though the leather side lived up to the boast that high fashion leathers buck the trend, the company lost about £300,000 selling Turkish lamb to the Middle East. The meat trading operation has now been closed, though Strong maintains a Turkish abattoir and a skin importing operation. It has also started exporting Turkish fruit into Europe.
Because of the £17m cash element, a successful bid would leave Strong with borrowings of well over 100 per cent of shareholders' funds. The company says this would be temporary. Running down combined stocks - which would amount to £26m - and better money management should bring down debt quickly and Strong could stand short term borrowings of £6m or£7m.
So far, though, Garnar has only made non-committal noises. With its shares standing only a penny above the offer price, the market does not appear to believe the offer, at a small discount to net assets and implying a PE ratio of 12 on last year's depressed profits, will spark off an auction.
The acquisitive food group Hillsdown, rumoured to be interested because it has a few abattoirs and a couple of fellmongers, is unlikely to be tempted to stick its oar in. But a white knight won't be easy to find either, so unless Garnar comes up with a startling defence, the quoted leather section looks set to shrink by a third. Lisa Israel
