Companies: RWS   

A shell company with only £3,000 in the bank does not usually make the most attractive takeover prospect. Except, when the same shell has £11 million of capital tax losses.

Health Media has now bought Bybrook, the holding company for RWS, by issuing shares to Brode, its principal owner with a 69.9 per cent stake, and other holders at 112.54p each. That deal was accompanied by a £21 million placing of Bybrook shares held by investment group 3i and others at the same price.

It all leaves Brode with 49 per cent of the new company, renamed RWS Holdings, with institutions holding nearly all the rest. Its initial market value of £42.5 million compares with Health Media's pre-deal price tag of £650,000 at 2.83p a share.

Brode, who founded Bybrook in 1990, says the new company should be able to build on RWS' role as Europe's leading translator of patents, with clients in the medical, pharmaceutical, chemical, defence, motor and telecoms businesses as well as many patent agents. Since Bybrook, backed by 3i, took control of RWS, formerly Randall Woolcott Services, it has thrived.

RWS grew sales and operating profits by 18 per cent and 36 per cent a year respectively between 2000 and 2003. In the last financial year, the group increased operating profits from £2.9 million to £4 million on turnover up 19.3 per cent to £25.3 million.

At about the same time, Brode recalls, 3i, which had 23 per cent of Bybrook, 'asked me what plans I had to get them out. We started to explore and warm up Collins Stewart.'

The broker looked at figures showing Health Media losing £5.3 million in the year to February 2002 before it divested its operating businesses and cut its loss to £118,000 in 2002-03, while RWS was piling up the profits. 'Collins Stewart decided the sort of price they thought we could get,' recalls Brode 'and they started pre-marketing the deal in June.'

Strategy
Brode (who is also a non-executive director of Vitesse Media, publisher of Growth Company Investor) argues RWS leads the European market in translating patents and intellectual property-related documents. With 65 in-house translators, who are also experts in chemistry, engineering and other fields, the company translates more than 30,000 documents a year.

Claiming scant direct competition, bar some large patent law firms and an army of freelancers, RWS says it continues to benefit from a trend among large European companies towards outsourcing their translating.

Brode sees the rumbling juggernaut of European Union legislation and human rights enactments as big opportunities for RWS. From interpreting for police forces to anticipating the patent translation implications of the human genome project, the trick is to spot the trends in time.

Building a name for expertise is also important for maintaining margins. 'We need to educate people to go for quality not price', declares Brode, optimistically.

'This business depends on referrals', he points out. Once patents are filed, what needs to be translated is already in the public domain and so satisfied clients have no problem recommending RWS to others.

For example, RWS, which operates in the UK, Europe, New York and the Far East, broke into Japan despite warnings that anyone doing business there had to use a Japanese patent attorney. 'If you look hard, you can get in there', says Brode, noting that RWS had a core client, 3M, which was 'happy to refer us to other companies operating in the market.'

In addition to translating, RWS has an information division, which searches and retrieves patents and trademarks as well as related documents and also checks their ownership and duration. This now accounts for around 11 per cent of sales.

In 2000, Bybrook sold Eclipse, a legal publishing business, to Reed Elsevier 'for a substantial profit'. This came partly in £20 million loan notes issued to Bybrook.

Some £2.5 million of these have been redeemed, but £17.5 million mature in January 2005. Brode says it is the capital gains liability on these which made Health Media's tax losses so attractive: 'we are endowing the business with Reed's cash to take it forward.'

Management
At 63, Brode plans to 'stay on for some time' as £200,000-a-year executive chairman, to build on the higher profile he argues the Health Media reversal has brought to RWS. An accountant by training, he ran Wolters Kluwer (UK), one of Britain's largest business-to-business information groups, from 1978 to 1990.

Elizabeth Lucas, 47, the new group's executive director, joined RWS as a linguist in 1977. She moved to management in the late 1980s and became head of translation after the Bybrook takeover.

Finance director Michael McCarthy, a former agricultural accountant at Booker McConnell and chief accountant at the RAC, joined RWS three years ago.

As Brode says, the company's key resource is its translators. But, if RWS can maintain its market strength, he argues they are unlikely to develop itchy feet.

Prospects
Brode and his colleagues intend to use the institutional backing and publicity attracted by the Health Media reversal to gain greater recognition and more business, possibly even attracting a bid. RWS would like a presence in Washington DC and, for that, 'it helps to be listed'.

Since March, RWS directors say trading has 'exceeded expectations', with sales for the first five months of the current year 'significantly ahead of the same period last year'. A significant strengthening of sterling against the euro could dampen short-term profits, but, for the longer-term, Brode argues 'we have only scratched the surface'.

Developing markets outside pure patents makes sense, especially in the light of two potentially threatening developments within the European Union. Proposals are afoot to introduce a 'Community Patent', which, once granted to an applicant, would do away with the need for the full patent to be translated into the relevant EU languages.

The Community Patent could come into force within three years, says RWS, which argues later amendments could blunt its impact. Theoretically more troubling is the 'London Agreement' of 2000, which waives the requirement for patent translations to be filed in signatory countries. However, the London Agreement has not come into force yet and will not do so until at least eight of its signatories ratify it.

Valuation
No profit forecast has yet been issued for the transformed RWS, but Brode and his team are upbeat about current prospects. But, however well RWS is doing at the moment, it cannot pay dividends because of a deficit in the distributable reserves of the old Health Media.

That is why the courts have been asked to authorise a reduction in the company's authorised capital to allow a dividend to be paid. Brode says he has a target yield of three per cent at the placing price of 112.54p a share.

That should please both the institutions and private investors. If the feared EU patent rule changes either do not materialise or have less impact than feared and the company can beef up its other search and translation activities, it should win friends and even bidders.