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Ailing Eurocopy ripe for a bid

The Investment Column
Eurocopy's corker of a profit warning yesterday was long overdue, though the scale of it was sobering. News that the UK photocopier distributor would probably lose almost a third of its copy volume over the next three years as a result of aggressive pricing from manufacturing giants such as Canon and Toshiba left the group's share price down 26p to 32p. Though house broker Panmure Gordon snipped just pounds 500,000 off full-year pre-tax forecasts to pounds 4.5m, it now expects just pounds 2.4m next year compared with a predicted pounds 5.2m and probably around pounds 1.5m in 1999.

That Eurocopy is the last remaining quoted UK distributor is no accident. Photocopier companies operating in the UK have been appalling investments. Beset by allegations of unscrupulous selling practices, culminating in an OFT investigation three years ago, and a string of profit warnings, Erskine House, Southern Business and Gestetner were all taken over. The only star has been Danka, a heavyweight which has wisely steered clear of the UK market. With Alco Standard, Danka is now one of the two most important US photocopier dealers. Even so, the fallout from Eurocopy's warning left Danka shares 30p lower at 740p.

Danka and Alco are at the heart of Eurocopy's problems. With both buying up the dozens of tiny photocopier dealerships around, the big six photocopier manufacturers have been losing market share. This is not just on selling or leasing the machines, where everyone typically makes losses, but the potentially lucrative businesses of consumables - ink, paper and machine parts - and after-sales servicing.

To claw share back, Canon and Sharp in particular have been offering huge discounts on copy prices, typically charging pounds 10 per 250,000 copies versus Eurocopy's pounds 15. Competition has been most severe in the south and London where the manufacturers have offices and where, unfortunately, Eurocopy has most of its high-volume customers.

Cyril Gay, Eurocopy's chairman, admits that against the might of manufacturers such as Sharp, his company has no chance of retaining contracts. Instead what he has to do is find smaller customers further north who care more about service than price. Eurocopy could also raise enough cash, probably around pounds 12m all in, to vacuum up some of the 1,000-odd tiny UK dealers who will also be struggling. That would give the company more critical mass - essential if it is to compete in the high-volume, digital copier market.

However, Mr Gay's biggest hope is that Danka, or even Alco, will take advantage of Eurocopy's share price collapse and launch a bid. Mr Gay, who, with his three daughters, owns 30 per cent of Eurocopy's shares, won't need much persuading to sell up. Without a bid, investors face the prospects of dividend cuts and continuing pressure on the stock price. The group's shares are on a forward p/e ratio of 5 times earnings this year and 10 the next. Ripe for a bid, but on fundamentals, avoid.