GUS is in the bag, but Hollinger is a bridge too far for the Barclays

By the time you read this, life will have changed dramatically for Sir David and Sir Frederick Barclay.

The entrepreneurial twins’ already nail-biting bid to gain control of Lord Black of Crossharbour’s publishing empire Hollinger Inter-national will no doubt have reached an even higher plane of legal complexity. But they will still be digesting the fact that against all odds, Secretary of State for Trade and Industry Patricia Hewitt has given the green light to their audacious £590m acquisition of Great Universal Stores’ (GUS) home shopping business.

The Barclays bought GUS last May knowing they would have to fight to get retrospective competition clearance. Few commentators would have been surprised if the Competition Commission, which completed its investigation just before Christmas, had recommended that the brothers must sell, close or restructure the group they planned to merge with their own Littlewoods home shopping group. Incredibly, the commission cleared the merger with no divestments whatsoever.

For lawyers – especially the twins’ chosen UK and US advisers, Lovells and Skadden Arps Slate Meagher & Flom respectively, the Barclay brothers are dream clients. Besides the promise of huge fees, acting for clients who like to fly by the seat of their pants is always going to be a demanding and exhilarating experience. However, even the Barclays might have bitten off more than they can chew with Hollinger.

The difficulties associated with the Barclays’ purchase of Hollinger International, publisher of The Telegraph and The Sunday Telegraph, have been well documented over the past couple of weeks.

We’re not just talking about a case of shareholder activism here, though that was a key factor. US financial institution Tweedy Brown first made an official complaint way back in August last year about $74m (£40.4m) in fees paid to Lord Black and other Hollinger executives through ‘non-compete’ agreements. The aftermath of that complaint will throw up numerous problems.

The Barclays are attempting to buy in at the top of Lord Black’s labyrinthine company holdings, bypassing other potential bidders such as Richard Desmond and the Daily Mail.

The acquisition of Lord Black’s stake from his Canadian private company Ravelston gives the Barclays control of 78 per cent of Hollinger Inc; the other 22 per cent is publicly quoted and the brothers must launch a takeover process by 28 January to buy it up. Hollinger Inc in turn controls 30 per cent of the equity, but crucially 72 per cent of the voting rights in Hollinger International where the publishing assets are.

But the potential pitfalls are legion. Lord Black and Hollinger International’s former chief operating officer David Radler have been hit with a $200m (£109.3m) law suit from Hollinger International’s special committee demanding the reimbursement of alleged unauthorised payments made to the peer and his top aides.

Lord Black has set aside $60m (£32.9m) from the sale proceeds to deal with liabilities, but the Barclays are taking a gamble that this will cover them.

Then there is an investigation into the company by the Securities and Exchange Commission and Canadian financial regulators.

Not to mention the now mind-bendingly complex legalities surrounding the sale of Lord Black’s shares to the Barclay brothers. Is he allowed to sell, or is it up to Hollinger International’s special committee, which has instructed Lazard, to find a buyer? Will Lazard, advised by Slaughter and May, continue to seek out interested parties for the company’s assets?

As one lawyer says, the brothers are commercially savvy and shrewd businessmen. If it appears that they are prepared to push the envelope, they can, simply because they have no one to answer to but themselves. They can move quickly and audaciously on deals – Hollinger being a perfect example.

Ironically, with Hollinger, unlike with GUS, the regulatory issues are unlikely to be a deal-breaker. The main quirk is that the deal will be the first to be considered under the new Communications Act, which came into force on 29 December last year.

The Barclay brothers already own a number of newspapers including The Scotsman and Scotland on Sunday.

Under the Fair Trading Act 1973, if a newspaper proprietor wanted to acquire a title that amounted to 500,000 copies or more, they would have to gain consent from the Secretary of State following a Competition Commission inquiry. The penalties were pretty draconian – not gaining prior consent was a criminal offence.

With the implementation of the Competition Act, prior consent is not mandatory. Newspaper acquisitions are examined in the same way as a normal merger – the Office of Fair Trading will investigate. But, unlike in a normal merger, the Secretary of State can intervene if she thinks there are wider public interests at stake, which is when Ofcom, the Office of Communications which came into force on 29 December, will wade in.

While there is the potential for some high-level muscle-flexing over Hollinger if Ofcom does become involved, the general City consensus is that regulatory-wise, all looks well.

The potential problems are elsewhere. Aside from the legal battles, including Lord Black’s recent application to an Ontario court to prevent an intervention by Hollinger International’s special committee, there are other pitfalls.

What if Hollinger Inc had problems paying the $7.4m ($4m) of interest on a $120m (£65.6m) senior secured debt due on 1 March? If this happened, it could damage the transaction.

The upside for the Barclay brothers is obvious. If they win out, they have jumped a very long queue for the assets, picked up a bargain and entertainingly out-foxed a number of people along the way.

If the twins were looking for an even more challenging acquisition than GUS, they couldn’t do much better than Hollinger. On the evidence so far, it is going to be one hell of a struggle, even for these experienced businessmen.