Pentos chief hits at 'poisonous' research note

TERRY MAHER, chairman and chief executive of the Pentos bookshops group, has clashed with John Richards, the highest-rated stores analyst in the City, over a sell recommendation that has helped drag Pentos shares to an eight-year low.

Mr Maher accused Mr Richards, of NatWest Securities, of 'significant errors', 'lack of balance', 'a consistently hostile tone' and 'a poisonous assertion' in the research note entitled 'Pentosaurus?' that was sent to NatWest investment clients last week.

Some investors are increasingly concerned about the accounting methods of Pentos, which treats the lump-sum payments it receives when it signs long-term leases in shopping centres as immediate profits.

Around half the pounds 4m in pre- tax profits it made in 1992 are thought to come from these payments, known as reverse premiums or negative premiums. They are paid by developers desperate to find tenants for their empty shopping centres.

Pentos shares fell to a 441 2 p nadir on Tuesday, after NatWest recommended shareholders sell because of worries over the company's accounting techniques, cash constraints, borrowing levels, and perceived threats such as VAT on books. They ended the week at 45p.

Mr Maher, who set up Pentos in 1972 and expanded it to include the Dillons, Hatchards, Claude Gill, Athena and Rymans chains, has seen his personal shareholding plunge in value from about pounds 4m to pounds 1m over the past two years.

Mr Richards and his stores team at NatWest have repeatedly been voted the best in the City, according to the Extel Financial survey of institutional investors. The research note was written by Sean Eddie, under the auspices of Mr Richards.

It had already been toned down twice before publication, after Mr Maher complained about earlier drafts. But in a later letter to Mr Richards, Mr Maher protested: 'Your note retains significant errors, a lack of balance and objectivity, and it's consistently hostile (in) tone.'

Addressing eight different criticisms, he concluded by writing: 'I particularly object to the poisonous assertion that 'Pentos appears to be clinging to 1980s methods and formats but is being overtaken by 1990s retailing realities'.'

Mr Richards replied by pointing out that Pentos shares had collapsed by 60 per cent relative to the market over the past year; that UK retailing had entered a tougher era to which Dillons' high cost base would not be suited; and that although Dillons would survive, it faced several challenges ahead. 'As to the share recommendation, this has to be opinion. If it was not and I could get it right, I would have retired some years ago]'

Pentos has already revised its treatment of reverse premiums, spreading the benefit over two years instead of one. But under a strict interpretation of accounting rules, the income should be spread over the entire period of the lease, which is usually 25 years.

According to accounting rule SSAP21, rental expenses should be spread evenly over the period of the lease. Whether reverse premiums are a component of expenses is a matter of interpretation.

Mr Maher told the Independent on Sunday: 'Of course we could be more prudent, but you don't get points for going to the other extreme. The purpose of accounts is to give a true and fair view.'

The treatment was on the advice of auditors Coopers & Lybrand. An audit committee under Sir Kit McMahon, the former Midland Bank chairman and a non-executive director, has recently been set up.

Pentos is one of the few retailers to disclose how it treats reverse premiums, which have been particularly significant for it because of its aggressive expansion of Dillons in 1991 and 1992. Its rival WH Smith is understood to treat reverse premiums more conservatively.

Two surveyors specialising in retail premises estimated that Pentos would have received reverse premiums of about pounds 250,000 last year for each average-sized Dillons store in a shopping centre. It opened a net 12 Dillons shops during the year. It also received reverse premiums for its smaller Athena shops. New Rymans shops would have been less likely to yield premiums because of their high-street locations.

Pentos has also come under fire for not starting to depreciate fixtures and fittings in its new stores until the second year.

In December it shocked the stock market, warning that it would not achieve profit targets. The 1992 results, reported in March, showed a slump in pre-tax profits from pounds 15.2m and a cut in the final dividend from 2.05p to 0.8p. The company also announced sharp cutbacks in new investment.

Fears that VAT may be introduced on books in November's Budget have depressed sentiment. There have also been worries that the Rymans chain will be hit by the arrival of edge-of-town superstores like Dixons' PC World and Kingfisher's Staples.

Mr Maher said: 'I'm afraid we're unloved at the moment and unfashionable. But fashions change.' The average spend at Rymans was pounds 4: 'The idea of anyone driving out of town to save 10 per cent on a pounds 4 purchase is ludicrous.'

He said he sold 200,000 Pentos shares in June to pay a tax bill. He still has 2.3 million.

(Photograph omitted)