ANALYSTS QUESTION C.E. HEATH BUYOUT

LONDON-Analysts are not convinced that a proposed management buyout at London-based broker C.E. Heath P.L.C. is the right course at a time when other brokers are merging.

C.E. Heath made public the buyout negotiations on May 30 after a surge in its share price on the London Stock Exchange. C.E. Heath disclosed that management and executive directors of the brokerage firm would get the venture capital for the takeover bid from London-based DLJ Phoenix Private Equity Ltd., the fund management arm of DLJ Phoenix Securities.

Heath said negotiations are advanced, and an offer is expected to be made by mid-June at a price of 143 pence per share, valuing the company at about (British pounds) 98 million ($160.2 million). While this price is more than 63% higher than Heath's opening share price on May 30 of 87.5 pence, shares have since traded around 130 pence.

The broker had 1995 gross revenues of $309.5 million (BI, July 22, 1996).

John Mackenzie Green, Heath's chairman, said the offer is a demonstration of management's confidence in the group's business and prospects.

He added that making C.E. Heath's executives partners will help bring about the necessary change in culture to enable the group to be one of the leading international brokering firms.

However, Roman Cizdyn, insurance sector analyst at Merrill Lynch Pierce Fenner & Smith Ltd. in London, said he did not think Heath's management buyout-the first for a publicly held U.K. broker-was necessarily the right response to the current changes within the global brokering community. "The true solution is consolidation or merger," as the other major brokers are doing, he said.

Despite the MBO team's claim that the takeover would enable it to bring in new brokering talent, it would actually make C.E. Heath smaller, as staff likely would leave in considerable numbers in the face of salary cuts that are inevitable with the downsizing of the brokering market due to megamergers, Mr. Cizdyn said. Heath would not comment on the issue.

Another broker, who preferred not to be named, said an MBO "makes a lot of sense" for shareholders but is not necessarily the best strategy to ensure Heath's future as a brokerage.

With the management buyout team offering 60% above the share price prior to the announcement, there is little doubt shareholders will accept the offer, "but in the longer term it will be a mistake" for the company. If it succeeds, the MBO would lock in key staff but also would result in job cuts, he said.