BUSINESS OPINION/John McManus: Now it gets serious. The board of Arnotts has until the end of the month to decide whether or not to recommend to shareholders a €12.75 per share offer from Carrgran, the bid vehicle put together by former manager Mark Delaney and financier Peter O'Grady-Walshe.

As the eight directors well know a bid at this level has to be taken seriously and cannot be dismissed with the ease that previous approaches from Carrgran have been dispensed with.

It is some €1.35 above the net asset value of the company and as Carrgran has made clear it does not involve a raid on the pension fund, or asset stripping.

If the board knows this, you can be sure the institutional fund managers - who between them own around 25 per cent of the company - also know it. They also know that if Carrgran can get Arnotts into play there is the possibility of a rival bid emerging.

It is also clear to staff that a bid at this level must be given consideration. Mandate and SIPTU have called a meeting to discuss how to use their 4 per cent stake and their pension fund's 12.8 per cent stake "to secure their future".

Faced with this, the Arnotts board will need a good reason to reject the Carrgran offer. It will have to present a cogent case as to how - by rejecting the bid and sticking with current management - it will deliver a share price in excess of €12.75. This is not an impossibility.

The current management can point to a respectable record of earnings growth, but on the other hand Carrgran can argue that when you strip out various factors the company has only ticked over under the incumbent management.

Equally importantly the Arnotts board will have to show that the Carrgran offer got a fair hearing.

The issue here is that the chairman of the company and several of other directors are seen to be linked with a rival management buyout that ran out of steam last summer.

This MBO effort put together by Seamus Duignan, the chief executive, was seen to have the support of the chairman, Michael O'Connor, and influential non-executive director Richard Nesbitt.

Mr O'Connor owns 3.5 per cent of the company while Mr Nesbitt and the extended Nesbitt family controls some 15 per cent. Both the Nesbitt and O'Connor families have been associated with Arnotts for generations, with Mr Nesbitt's father, grandfather and great grand father all having been chairman of the group.

Another executive director, Bill Kelly is also seen to be linked to the MBO.

In order to deal with this problem a sub-committee of independent directors was set up early last year to consider the MBO and any approach that might materialise from Carrgran which had also signalled an interest. Once the MBO petered out in the middle of last year the sub-committee was stood down and the issue of considering any bid from Carrgran reverted to the full board.

It would seem pretty clear at this stage that the sub-committee should be reconstituted if the Arnotts board wants to ensure that there is no question of the Carrgran offer being perceived as not getting a fair hearing.

It is also important that the Arnotts pension fund - which owns 12.8 per cent of the company - is seen to have acted independently. The issue here is that Mr Duignan and Mr Kelly are trustees of the fund. Traditionally the pension fund has supported the board and its holding formed part of a defensive strategy put in place by the previous chairman, Tom Toner.

Insiders say only 40 per cent of the fund is managed by outside managers while the remainder is directly invested by the trustees. This unusual approach has proved successful, with the fund currently running a substantial surplus, which has allowed Arnotts take a "holiday" from its pension contributions, saving the company something in the region of €3 million a year.

The Carrgran offer raises a number of specific issues for the fund and it needs to be seen to have considered them and not blindly supported the board. The obvious solution here is for the trustees to appoint independent advisers.

The most obvious reason for the pension fund to reject that offer is that its surplus funds will be raided by the new owners. This would appear to be something of a red herring at this stage. The new owners would only be entitled to half of any surplus "liberated" by them because the other 50 per cent would be distributed to beneficiaries. They would also have to pay tax on the money.

All in all Carrgran could not hope to get its hands on more than €25 million of the €60 million surplus in the fund. When you weigh this up against the €3 million a year in pension fund contributions that the surplus saves the company, it is easy to see why Carrgran has ruled out any raid on the fund.

The other issue that the fund trustees need to show they have considered is that the Carrgran offer is a solution to the problems caused by the fund being an investor in Arnotts in the first place. Since the collapse of Robert Maxwell's empire such investments are not considered good practice and there is a move to exclude them from valuations of funds.

It appears, then, that regardless of what happens the pension fund will have to be a net seller of Arnotts shares going forward. What the trustees must consider is whether they will get better value trickling the shares out over the next few years, or accepting the €12.75 currently on offer.

It is not all bad news for the Arnotts board. It is lucky that in Brian Davy and Howard Kilroy they have two very well known and respected non-executive directors that are not seen to be connected to the failed MBO.

Mr Davy is senior partner in stockbrokers J&E Davy and Mr Kilroy a former Smurfit executive and governor of the Bank of Ireland.

Leaving the consideration of the Carrgran bid to a subcommittee based around these two men would go a very long way to quelling any criticism of the Arnotts board's handling of the process. In any case it is time for the two men to start making their presence felt.

jmcmanus@irish-times.ie