Struggle Over BAT Is an Un-British-like Brawl

The theater season does not open here for a few more weeks, but the best show in town is already playing in the boardroom of one of Britain’s largest conglomerates and in the offices of the man seeking to take it over and carve it into pieces.

Sir James Goldsmith’s $21.1-billion hostile bid for BAT Industries is not only the largest takeover battle in British history, but also a drama of ideologies and values in conflict.

And for Goldsmith, it is a frenetic game of Beat the Clock as well: British takeover rules give him only until Oct. 28 to complete the seizure.

Goldsmith is a flamboyant Anglo-French buccaneer who wears custom-made silk suits rather than an eye patch and has been buying and selling companies for three decades. He casts himself as the champion of change, contending that BAT is a vast, decaying empire whose distant pieces need to be “liberated”--sold off so that both they and the parent company can reach their full economic potential.

BAT Chairman Patrick Sheehy is the epitome of the lifelong company man and a defender of traditional corporate values. He argues that diversification and growth are the key to economic survival in the modern business world.

Such a conflict inevitably has become personal. Goldsmith paints Sheehy and BAT’s management as hidebound and devious, seeking to frustrate the takeover bid to protect their own sinecures and expense accounts. Sheehy says Goldsmith is a greedy opportunist seeking to mislead BAT’s shareholders and wreck the company while lining his own pockets.

Mired in Paper Work

Despite the melodrama, in the end this is a conflict about money and power: Goldsmith and his two main partners, financiers Jacob Rothschild and Kerry Packer, stand to make a vast profit if they can succeed in either taking over BAT or forcing the company to buy them off. BAT’s managers are fighting to retain a corporate empire and their own control over it.

The irony is that the fate of Britain’s largest non-oil company may be decided not in the trading pits and boardrooms of London, but in the offices of state insurance commissioners across the Atlantic. Goldsmith’s bid has become mired in a morass of paper work and litigation in the United States because part of it involves buying and selling BAT’s insurance subsidiary, Farmers Group Inc., the 15th-largest U.S. insurer.

Unlike the United States, Britain has adopted a code of takeover rules designed in theory to maintain a modicum of restraint and to protect shareholders and the marketplace. Every broadside that Goldsmith and BAT fire at each other must first be cleared with a lawyer from the Takeover Panel.

But neither side appears too fastidious in honoring the rules. Goldsmith, who started the clock running by formalizing his bid on Aug. 7, now is waging a public campaign to pressure the Takeover Panel into allowing him to breach the deadline.

BAT, for its part, seems to be bending the rule that forbids a takeover target from actively seeking to frustrate the bid. Goldsmith claims that BAT has employed 21 law firms, 15 lobbying firms, 12 public relations companies and a detective agency and even has enlisted 203 members of Congress to thwart the bid. BAT denies its activities constitute “thwarting.”

“Any fight of this sort is so outrageous in scale and design that it is bound to become pretty cantankerous,” said Bruce Davidson of Smith New Court Ltd., a London securities firm. “It shouldn’t surprise anyone that people are no longer playing by gentlemen’s rules.”

‘Set Companies Free’

For Goldsmith, the BAT bid is the biggest gamble in a long career of risk-taking. BAT started life as the British-American Tobacco Co., but now it includes paper, retailing and insurance companies. It did $28 billion in business last year--more money than the gross national product of many Third World countries--producing a pretax profit of $2.7 billion. It does business in some 90 countries, employs more than 310,000 people and is owned by 145,000 shareholders.

At various times since the early 1970s, Goldsmith already has made ventures on the U.S. side of the Atlantic, having bought and sold all or part of such giants as the Grand Union grocery chain, Diamond International Corp. and Crown Zellerbach. In 1986, he retreated from a $4.71-billion effort to take over Goodyear Tire & Rubber.

Goldsmith wants to shrink this empire back to the tobacco company, its original core component, while selling off the rest. BAT is a themeless, sprawling giant, he says, fat, complacent and old-fashioned. Each of the companies it owns would be worth more if it were broken off.

“The conglomerate structure suppresses value and stifles businesses,” said Goldsmith. “BAT is not a builder of businesses but, on the contrary, it administers their decline. It is our purpose to set these companies free.”

But Goldsmith and his partners have faced a cash problem from the first day of the bid. Their opening offer to shareholders consists only of paper--junk bonds and shares of stock in various holdings. To raise the vast sums of cash needed to make the bid more attractive, Goldsmith has to either find pre-sale buyers for parts of the company or pay millions of dollars in commitment fees to lenders, fees that are not refundable if the bid fails.

BAT may be a lumbering giant, but its home office is a small shop of about 100 employees who immediately reacted to Goldsmith’s challenge. Within hours the company had set up a takeover committee, within days a strategy complete with toll-free phone line for distressed shareholders, “No Deal” buttons and bumper stickers, full-page newspaper ads, television commercials and a no-holds-barred lobbying and legal campaign in the United States.

In its 48-page defense document issued a few weeks later, BAT skewered Goldsmith while proclaiming itself “a British success” that had produced “a world class performance” and delivered “outstanding returns for shareholders” over the past decade.

“Do not give up your valuable investment in return for junk bonds and a strategy based on asset stripping,” Chairman Sheehy implored shareholders. “This thoroughly unwelcome bid is designed to do nothing more than break up a successful company for the personal gain of extremely wealthy people.”

Focus on U.S. Holding

Sheehy conceded there was a gap between the value of BAT’s shares and “the underlying value of the businesses,” suggesting that shareholders had indeed been shortchanged, as Goldsmith has alleged. Sheehy promised to deal urgently with the problem--but so far, BAT has said no more. Analysts say BAT is biding its time, waiting to see if Goldsmith’s bid survives before embarking on major self-surgery.

Instead, BAT has concentrated most of its firepower on the place where Goldsmith’s bid looks the weakest--the United States.

Nine state insurance commissions must approve Goldsmith’s bid to purchase Farmers, which BAT itself bought for about $5 billion in a hostile takeover last year. By law the commissioners are supposed to determine who the new buyers are and how they are going to finance the purchase in order to ensure that policyholders are protected. In most states they have 60 days to make a decision, but the clock starts running only after the prospective purchaser files an application that includes a detailed disclosure statement.

Goldsmith has filed statements, but each commission has contended that his application is deficient and must be augmented by more information. As a result, he has fallen way behind schedule. He sought to assuage fears about the future ownership of Farmers by announcing plans to sell it for $4.5 billion to Axa-Midi Assurances, the large French insurer that already has extensive U.S. holdings. That move only seemed to lengthen the likely review process and confused commissioners, who do not know whether they should be examining Goldsmith or Axa-Midi or both.

Goldsmith has filed nine suits in federal courts to enjoin the commissioners from blocking the bid. He has also launched a counterattack against BAT’s lobbying campaign, contending the company is secretly coordinating the commissioners’ delaying tactics and even in some cases drafting their letters and paying their legal fees. He also accuses BAT of organizing a letter from 203 congressmen to the State Department expressing alarm over Goldsmith’s bid.

Genuine Concerns

“If they’re not involved in frustrating action,” he said of BAT, “then I’ll be dancing in the ballet tonight. The commissioners have to stand up and decide whether they are going to be the ‘poison pill’ that protects a tobacco conglomerate.”

Company officials contend the reservations expressed in Congress and by various state insurance commissioners represent their genuine concerns and are not the fruits of a BAT lobbying campaign.

Many British analysts do not like the idea that the maze-like workings of small state agencies in the United States can block a big takeover deal in Britain, and they support Goldsmith’s plea to the Takeover Panel for more time. If the panel does not accede, financial columnist Irwin Seltzer of the Sunday Times warned that British firms will have a foolproof way of avoiding hostile takeovers.

“All they will have to do to ensure their tenure is to acquire an American insurance company, or any other company subject to state regulatory oversight,” Seltzer wrote.

Win or lose, Goldsmith’s bid already has made its mark on BAT. The company two weeks ago announced a 22% increase in its dividends and has conceded that it will have to begin selling off some stagnant parts. Meanwhile, every new development has million-dollar dimensions. When Goldsmith admitted recently week that his bid most likely would fail unless the deadline was extended, BAT’s stock dropped 22 cents per share, a paper loss of $352 million in the company’s net worth.