Monsoon boss finds himself in the eye of City storm

Institutional investors claim they were misled over founder's plans to buy back shares

The few remaining independent shareholders in Monsoon have until 3 o'clock this afternoon to decide whether or not to kick up a storm about a highly controversial move from the retailer's founder and chairman that could leave them trapped in a illiquid investment listed on London's secondary stockmarket.

The publicity-shy Peter Simon, who launched his retail career by selling hand-crocheted woollen coats on a market stall in London's swinging Portobello market in the Seventies, is seeking to increase his family's control of the high-street chain to more than 90 per cent. He is using a tender offer so confusing that it makes understanding what drives the vagaries of the fickle fashion world that Monsoon serves look easy.

In a move that escaped the watchful eye of the Takeover Panel, the family trust set up to ensure that Mr Simon's four children enjoy a coddled future announced that it planned to acquire a further 20 per cent of the stock at what was barely a premium to the then share price. Rather than wade into the market to buy up the shares, which would have pushed up the price and, more importantly, forced the trust, Stoneycroft, to make an offer for the whole of the remaining minority, the Simon vehicle chose to sell put options giving investors the right to sell their shares to the trust at the distinctly unexotic price of 140p per share - or 136.5p excluding the dividend.

That was in July. Given that barely a month earlier the company had raised doubts over its future direction by revealing that Rose Foster, its much-vaunted group managing director, was leaving to join the rather less colourful retailer Littlewoods, there was at least some argument for either paying the 10p to take up the option or selling up, as Jupiter Asset Management and New Star did.

Since then, the validity of that argument has looked shakier and shakier as announcement after announcement from Monsoon has led shareholders to conclude that the Simons were taking them for a ride. The final poke in the eye came when the company revealed that Ms Foster wasn't leaving, but is staying to take up the newly created post of chief executive (and pocket a tidy bonus along the way).

Institutional investors are furious that Mr Simon intends to move the company from the main stock market to AIM, which will force them to sell their shares (most institutional investors do not like to hold shares in AIM-listed companies, where disclosure requirements are less onerous).

Some are even more furious that the directors neglected to mention that under Rule 3.19 of the listing rules, companies can stay on the main market with less than 25 per cent of the stock in the hands of independent shareholders in certain circumstances. They are also unhappy that, with more than 90 per cent of the stock, the Simon family is free to ride roughshod over the City's corporate governance code and make decisions, such as that concerning the company's dividend policy, without consulting shareholders. With just the future creature comforts of your family to consider, what need extraordinary general meetings?

Patrick Evershed, a fund manager at New Star, said he was left with no choice but to dump his Monsoon shares because "if Mr Simon is going to own 92.5 per cent of the stock then my shares would have become effectively unmarketable". Mr Evershed said he has contemplated complaining to the Department of Trade and Industry "on the basis that there is a possible breach of the Companies Act to the extent that a majority shareholder is treating a minority shareholder unfairly". But he added that he couldn't spare the "six months of my life" this process would take.

A spokesman for Stoneycroft said that it has played its cards out in the open. He said: "If the offer is so derisory, then why aren't there people out there buying shares?" Monsoon's shares yesterday slipped 1p to 136p. Yet he need not look very far for an answer. The clues lie both in Monsoon's chequered past relationship with the City, and the inherent "shyness" of its founder, who declined The Independent's offer of an interview.

While Mr Simon's retailing prowess is not in doubt - the company he founded in 1972 to sell ethnic fashions to the masses has more than 145 Monsoon shops in the UK and 155 sister shops - the question is why shareholders were ever led to believe that investing in Monsoon made sense. It was second-time lucky for the company's flotation after the City initially gave the group a hard time about the ultimate ownership of a Malta-registered trust that had a controlling stake in the business. The City should have given the company an even harder time about the 198p per share that Monsoon ultimately fetched in early 1998 - a level not seen since.

That Mr Simon, 53, who netted a £88m windfall from selling 27.5 per cent of his company, was not interested in the City's views was made plain by his absence on the day Monsoon debuted. He was travelling in India, so unable to comment on the immediate plunge in the company's valuation. His threat of a £100 fine for any director who mentioned the share price at board meetings was another less than subtle hint.

Analysts have lamented the company's less-than-fantastic disclosure, pointing to its refusal to break down sales and profits for Monsoon and its sister brand, Accessorize, as a particular bugbear. It is this lack of openness that many say is to blame for the company's disappointing stockmarket track record. One retail analyst said that Mr Simon had only to follow the example set by his rivals at French Connection and improve the liquidity and his communication skills for the stock to have been a runaway success. Analysts also worry that the history of Monsoon will put shareholders off investing in other companies with a strong family presence such as Matalan, Ted Baker and Majestic Wine.

Richard Ratner, at Seymour Pierce, has been the most vocal of the critical analyst community. His daily missives have become something of a must read, if only for the colourful rendition of a certain meeting between one of Stoneycroft's advisers and the stockbroker's corporate finance team that ended less than cordially.

The stockbroker has taken up the case of the slighted investors, including New Star and Framlington, asking Monsoon's independent directors why they don't seem to have acted in line with their general fiduciary duties.

Most analysts reckon that Mr Simon would have been better off - morally, if not financially - by paying the premium to take the company back into private hands. That way he could have been free to indulge his hippy roots, he once lived in a nudist colony in Ibiza, and enjoy his extensive art collection - he owns works by artists ranging from Francis Bacon to Andy Warhol to Damien Hirst - away from the public glare.

As for whether Mr Simon will get his way and take his family shareholding past the key 75 per cent and 90 per cent thresholds, well that will depend on what happens today.

Given that yesterday more than 9 million shares were snapped up in exceptionally heavy trading volumes, there are clearly some investors who want in.

With a company that's delivering double-digit sales growth, who can blame them?

GETTING ROUND THE TAKEOVER CODE

22 May Monsoon shocked the market with the news that its highly regarded group managing director, Rose Foster, had resigned to join Littlewoods but would work out six months' notice. Shares fell 6 per cent the next day. Company also set preliminary results date for 28 July.

2 July Stoneycroft, an investment vehicle owned indirectly by Peter Simon's four children, announced complicated scheme to raise family's interest in the business from 72.5 to 92.5 per cent. Drew City criticism for complex nature of the process, involving the offer of a put option to shareholders that would later allow them to sell most of their shares at an effective 7 per cent premium to the then share price. Warned may have to transfer from main market to AIM. Separate statement from Monsoon's board absolving directors from the need to give advice on the trust's plans because of structure of the offer. Reiterated need to switch listing to AIM.

28 July Monsoon reports results for year to 31 May after the first closing date of put option offer. Beats City expectations with 19 per cent jump in pre-tax profits to £38.2m. Like-for-like sales in seven weeks to 19 July up 11 per cent.

30 July Put options offer closes after Stoneycroft sells put options over or acquires 20 per cent of Monsoon stock.

4 August Monsoon announces that Ms Foster will be staying after all to take up the newly created post of chief executive some seven days after she told Littlewoods that she would not, in fact, be joining them. Shares have risen more than 10 per cent on news she will stay.

16 September One of Mr Simon's family trusts demands seat on the board. Monsoon reveals like-for-like sales up 10 per cent in the past 14 weeks.

17 September Stoneycroft hints at plans to cut dividend as it too asks for boardroom presence.

19 September Monsoon admits its international director John Spooner may have breached the Companies Act by taking up an offer of put options in respect of his 1 per cent stake. Mr Spooner considers action against his lawyers, Allen & Overy.

30 September Stoneycroft reveals Simon family has lifted shareholding to 74.9 per cent of Monsoon.