A key figure in the agreed bid for Dowding & Mills explained yesterday how he and his business partner acquired an undisclosed interest over nearly 20 per cent of the shares in the Birmingham industrial repairs company last winter.
Three private companies owned by Guy Naggar and Peter Klimt, chairman and chief executive of the investment bank Dawnay Day, bought contracts for difference over 30.11 million Dowding shares starting when the price was around 10p.
These give the buyer the right to any profit over the original "reference" price - and a liability for any losses - but no dividends and usually no voting rights.
The two men are thought to have emerged with a profit of around £2.5 million.
Their last purchases were on February 23 last year when the share price had reached 12.25p.
They closed out their interest at 20p on December 21, when the underlying shares were bought by the bidding company, Rydenor. It published its formal offer document offering 20p a share for the rest of Dowding the next day.
This revealed for the first time the investments by Messrs Naggar and Klimt, who will own half Rydenor when the deal is completed.
Mr Naggar explained that when Dawnay Day started using contracts for difference some years ago he took legal advice on whether they should be disclosed. The reply was an emphatic "no".
He was strongly advised not to send letters declaring interests in CFDs to the Takeover Panel or the Financial Services Authority.
"When you do not have votes it is sometimes looked upon in a funny way if you do disclose," he said. "Are you trying to get the price to go up?"
He and Mr Klimt took their stake in Dowding, he added, because they liked it, thought it was very cheap and regarded Tudor Davies, its chief executive, as a capable, professional manager.
Contracts for difference, sometimes described as spread bets for institutional investors, are widely used in the City. They escape stamp duty and tie up relatively little capital.