London scandal over Guinness takeover grows

The scandals affecting the City, London's financial district, have taken a dramatic new turn. Fresh disclosures have emerged of questionable takeover tactics; growing indications that Ivan Boesky, the now disgraced arbitrageur, is at the center of a government investigation; and the possibility that these incidents could lead to greater regulation of London's mergers and acquisitions market. Most of the attention continues to be focused on Guinness PLC, the international brewing giant, whose chairman and chief executive, Ernest Saunders, has temporarily stepped down while the Department of Trade and Industry (DTI) pursues its investigation into the company.

Although he has not been charged with any wrongdoing, Mr. Saunders is considered unlikely to return to run Guinness. In his absence, Sir Norman Macfarlane, a Scottish businessman, has been appointed acting chairman.

Saunders's abrupt decision to step aside came as the investigation focused on two areas of alleged wrongdoing. These are reports that Guinness purchased its own shares to drive up their price during a bitter 2.5 billion (US$3.75 billion) takeover battle for control of Distillers Company PLC, the international whiskey and gin concern, and that it may have colluded with Mr. Boesky on a scale greater than previously believed.

Before Christmas, Guinness acknowledged it had invested $100 million of its own money last May in a partnership managed by Boesky, after the bid battle had been won. In return, according to reports here, Boesky allegedly agreed in secret to support the Guinness share price, thereby boosting the value of its takeover bid for Distillers.

Guinness has justified its investment decision on the grounds that, at the time it acted, Boesky's reputation was still intact and that the company also intended to use the funds as a springboard for expansion in the US.

Analysts contend these arguments are specious, however, noting that at the time Guinness took over Distillers it had a high level of borrowings and that this investment in Boesky's partnership fund was a high-risk speculative venture.

But the scandal does not end here. Other heads have already started to roll, and more companies are likely to be drawn in by the DTI investigative net.

``We've only seen the tip of the iceberg,'' said one analyst who declined to be named.

More recently, Oliver Roux, Guinness's finance director, who transferred from the Boston-based management consultant Bain & Co., has resigned after sending a letter to Guinness's solicitors and after a meeting he had with DTI officials. He reportedly disclosed that buying of Guinness shares by investors friendly to the company was more widespread than previously realized.

Apart from the alleged reciprocal financial links between Boesky and several directors of Guinness, it is believed that Morgan Grenfell & Co., a leading British merchant bank, helped to mount a support action to prop up the share price. The bank was adviser to the brewing company during the takeover bid, but recently withdrew from that role.

Henry Ansbacher & Co., another merchant bank, claims it bought Guinness shares with money provided by the brewing group and was given an indemnity by Morgan Grenfell against any possible losses on share purchases by its clients. Guinness disputes these charges.

Guinness says it placed 7.6 million ($11.4 million) with Ansbacher only as a deposit.

Under British law, a company is not allowed to buy its own shares without specific permission from its shareholders. Guinness did not obtain this permission. If it could be proved that it did so, this could lead to prosecution of Saunders and Mr. Roux.

In addition, if Guinness is charged with wrongdoing as a result of the investigation, the Argyll Group PLC, which lost to Guinness in the battle for distillers, could file claims worth several hundred million pounds.

Another casualty of this affair was Roger Seelig, Morgan Grenfell's chief merger and acquisition specialist. He had a reputation as a high flier in corporate finance and was known for pushing the city's takeover code to the limit. He recently resigned his position.

It is expected that a Guinness board meeting this week will place a further question mark over the future of two other Guinness officials, Tom Ward, a Washington-based lawyer, and Dr. Arthur Furer, a director of Nestl'e, the Swiss food giant. Both men were Saunders appointees who became non-executive directors of Guinness.

As the city has reeled from each new disclosure, there have been new reports that an insider trading case involving Geoffrey Collier, a former Morgan Grenfell securities director, may have been on a far greater scale than previously acknowledged. Mr. Collier resigned late last year after being accused of unauthorized dealing in an unrelated takeover bid.

For his part, Collier has appealed to the attorney general to have his case thrown out of court, on grounds that massive media coverage has made it impossible for him to get a fair trial.

Indeed, public alarm over these scandals has generated mounting political criticism of the City. Opposition Labour Party members of Parliament have called for the suspension of Guinness's share quotation and for Paul Channon to be removed as trade and industry secretary because of family connections with Guinness.

Roy Hattersley, who would be chancellor of the Exchequer if the opposition Labour Party were elected, has led the attack on corruption in the City. This represents an about-face from earlier attempts to woo the British financial community. Analysts say his actions are an effort to make political capital out of these issues.

``With the general election coming up, this is seen as a vote gatherer,'' one analyst said. ``The City has always been identified with the Conservative Party.''

Whatever the outcome of the Guinness and Collier affairs, the scandals, the widening government probe, and political pressure are expected to lead to tighter government regulation of London's takeover market.

``This should result in a more regulated environment,'' said one analyst who declined to be identified. ``This is anathema to the free-trade policies of the Tory government, but there will be mounting pressure to establish a body like the SEC [Securities and Exchange Commission] in the US.''