No Pain, No Gain: Interserve joins the club and Lennox stays put

The takeover of the MacLellan support services group has created a minor hiccup for the No Pain, No Gain portfolio. Suddenly - and quite unexpectedly - it found itself in possession of a handful of unwanted shares.

Interserve's £116m cash and share offer did not pan out quite as I expected. The bid was 80p cash and a percentage of an Interserve share for each MacLellan share. For those seeking all cash - or, indeed, all shares - a mix and match facility was offered, whereby the wishes of accepting shareholders were, as far as possible, accommodated by switching around the cash and share elements.

During my near-50 years in the City, I have encountered a few mix and match deals and I have always got what I wanted - cash. That is because many investors are, for tax reasons, happy with share exchanges, so cash has been in plentiful supply. But this time the money ran out - it was, in fact, a mix and mismatch.

The result is that many investors - including the portfolio - who wanted all cash, find themselves on Interserve's share register. We are not very happy.

And I suspect that Interserve, which (like MacLellan) is a support services group, is not too pleased either. After all, it is often implied that small shareholders are an expensive nuisance.

Well, Interserve, which should feel humiliated by so many rejections, has collected quite a few of us. For example, investors who had 1,000 MacLellan shares now own 92 Interserve shares.

It seems that shareholders owning the vast majority of MacLellan's capital opted for cash. Clearly they could not all be satisfied, so the make-up of the bid was tweaked. Those seeking money-only deals have had to settle for 80.67p in cash and a slice of an Interserve share. With Interserve below the level achieved when the deal was struck, accepting shareholders have received a little less than originally promised - around 115p against the signalled 116p.

For the sake of transparency, I put £5,000 into each constituent. Therefore I had the choice of lifting the Interserve shareholding or unloading. I opted to sell - at 374.5p. This means the portfolio's return from MacLellan has been reduced by £50 or so.

I can live with such a modest shortfall, but small investors will not be so lucky. The portfolio is a notional exercise. It does not meet dealing costs - nor receive dividends. But any former MacLellan shareholder selling his modest Interserve shareholding will have to pay dealing expenses. Including the £10 or so charge for a certificated trade, a holder of 1,000 shares will find the takeover consideration eroded by some £30.

I hesitate to berate the mix and match facility. But, once again, small shareholders are the principal sufferers when intentions are not fulfilled. Perhaps the merchant bankers involved should have given the composition of the takeover more thought. What seemed a good deal on the surface has left many small shareholders out of pocket or with derisory shareholdings. Indeed, those who decide to retain their modest stakes are probably right to do so.

Still, from a portfolio standpoint, MacLellan is a far more satisfactory investment than Lennox. Shareholders approved the crucial rescue package and I hope, as managing director Ray Greenwood suggests, the "resurrection" of the company is under way.

The heartbreaking aspect of the Lennox disaster is that it is largely self-inflicted. Quite frankly, a tax underpayment should have been spotted in the due diligence ahead of flotation. Boardroom rows merely exacerbated the turmoil. So it's been a worrying time for investors, and quite clearly the group's trading has suffered.

When the portfolio got involved, paying 64.5p a share, the company seemed on a roll. Its business of supplying well-known British brands to ex-pats and holidaymakers in Spain was booming and there was heady talk of expansion into other European markets.

But profits have given way to losses and the current share price - a mere 4.75p compared with a high of 75.5p - starkly demonstrates the stock market's loss of faith. Greenwood and colleagues face a long hard slog, and with the rescue shares priced at 10p, the City institutional investors that came to Lennox's aid will, in many cases, be tempted to sell if they see a reasonable profit.

I don't expect the portfolio will get its money back but if Greenwood is right losses could be reduced.