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The Financial Times
Tuesday, 2 August, 1988
The Fayed empire under scrutiny
By John Plender
Ten days ago Trade Secretary Lord Young received the report of his two inspectors into the takeover in 1985 of House of Fraser, owner of Harrods. Its publication, due shortly, is expected to unveil a scandal that may prove highly embarrassing for the Government.
It could also bring to a climax the vituperative battle between the buyers, the Egyptian born Fayed brothers, and R.W. "Tiny" Rowland, chief executive of Lonrho. A further consequence may be some reappraisal of Britain's arrangements for regulating takeovers, especially those from companies based in secretive locations such as Liechtenstein. For the authorities cannot allow Lonrho's noisy vendetta to distract attention from wider issues of public interest concerning the way in which control of major companies is allowed to change hands.
A useful point of entry into the Harrods saga is by way of the regulatory institutions, notably:
- The Department of Trade and Industry. Under the Fair Trading Act 1973 it is the Secretary of State who decides whether bidders should be subject to an official inquiry. Since House of Fraser's assets exceeded the £30 million statutory threshold, it was eligible for investigation.
- The Secretary of State can refer bids to the Monopolies and Mergers Commission, the MMC; which investigates whether the merger would operate against the public interest. In 1984, Norman Tebbit, then the Trade Secretary, announced that references to the MMC would be made primarily on competition criteria. But the Act also allows investigation on other public interest grounds, including foreign ownership. This has been done where a bidder's possible lack of financial resources and management experience has caused concern, as in 1932 when Mr Alan Lewis's Isle of Man company, Abele, bid for textiles group Illingworth Morris. The bid was subsequently cleared.
- The Director General of the Office of Fair Trading (OFT) advises the Trade Secretary whether to refer a bid and what to do when the MMC has reported.
- The Takeover Panel, which lacks statutory powers, is chiefly concerned with the detailed management of takeovers and the fair treatment of shareholders.
The OFT's involvement at House of Fraser started in 1984 when the Fayed brothers paid £138m for a 29.9 per cent stake owned by Lonrho -- a spectacular own-goal since Tiny Rowland never expected or wanted a bid to follow. The MMC had blocked an earlier bid by Lonrho and was investigating its stake at the time.
The Fayeds then launched their £615m offer for the stores group. The OFT did not recommend an inquiry and Mr Tebbit waved the bid through in just 10 days, saying it raised no competition issues. The takeover Panel, meantime, was conscious that shareholders were happy. Within weeks the Fayed brothers -- Mohamed, Salah and Ali -- had transferred control of the stores group to Liechtenstein.
How did these little-known Egyptians persuade the regulatory authorities to say yes to a bid for this highly visible, very British asset: a group whose flagship was Harrods?
Enter top-flight City merchant bank Kleinwort Benson. In persuading Kleinworts to accept them as clients, the Fayeds had taken a key step towards credibility. For Kleinworts soon proclaimed that the brothers came from an old established Egyptian family who for more than 100 years were shipowners, landowners and industrialists in Egypt.
Kleinwort's submission to the OFT listed a range of international businesses and referred to the brothers as "leading shipowners in the liner trade" and to their "ownership of 75 Rockefeller Plaza" in New York, one of America's more celebrated pieces of real estate, together with the Paris Ritz hotel. Brian Basham of Broad Street Associates, the flamboyant PR man called in by Kleinworts, swung into action. Fleet Street was soon generating reports about fabulous dynastic wealth. Grandfather Ali's cotton had kept the mills of Lancashire turning in the last century; there was a shipping fleet carrying pilgrims and cargo around the Gulf.
When question were raised about the Fayeds ability to finance a £615m bid, the Broad Street press releases carried stiff warnings that "the Fayed brothers are advised that any allegations that they are not acting on their own account are defamatory."
At the time John MacArthur, then a director of Kleinworts, told me in a television interview that the money came from the brothers' own resources, which stemmed from family businesses going back several generations. He added that "their net worth, from what I know, is several billion dollars" -- despite not having seen any consolidated financial statements of the Fayeds' business empire. All this was good enough for the government, which announced that in deciding not to refer the bid it had relied on assurances given by the brothers and by Kleinwort Benson. But it infuriated the man whose ambition to own Harrods had been thwarted -- Lonrho's Tiny Rowland. His lobbying scored a surprise victory just two months before last year's general election when the government conceded an inquiry.
Independent investigation by the Channel 4 programme "The Harrods Sale", broadcast on July 24, suggests that Tiny Rowland -- notwithstanding his parti pris -- was on to something. The programme argued that two crucial claims, which were accepted and advanced by Kleinworts, were false. Those claims concerned the brothers' family background and wealth.
Inquiries in Alexandria revealed that the brothers were brought up in the old customs area of the city, the down-at-heel Gomrok district. According to former friends and neighbours, their father was a teacher; their grandfather had been a villager in the Nile delta; those questioned knew of no business empire. When last seen by a classmate Ibrahim Arabi Abou Hammad, in 1948, Mohamed Fayed was a Coca Cola seller.
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