Bids invited as Racal Telecom float shelved

RACAL, the electronics group, is willing to consider offers for its telecoms arm after failing to find a chief executive to head up the division.

Sir Ernest Harrison, Racal's chairman, yesterday said that the flotation of Racal Telecom remained his "preferred option". However, he added that the group was willing to entertain offers for the unit.

"If a third party was to approach us with a proposal that reflected the value of the business we would naturally consider it," he said.

Sir Ernest admitted that the group had struggled to find a suitable chief executive to lead Racal Telecom through a flotation. "We have been searching since last December and have interviewed many people, but not yet found someone of the highest calibre," he said. "This is a young industry and a lot of chief executives are in well-paid jobs."

His comments were made as Racal plunged to a pre-tax loss of pounds 207m in the year to March after disposing of its Data Communications division for less than expected. Shares in Racal fell by 10p to 383.5p as the group sold the division to Platinum Equity, a US venture capital group, for $47.5m (pounds 29m). Racal will only receive $12.5m up front, with the remainder linked to the division's sales over the next 10 years.

Sir Ernest said the figure was lower than expected because Racal had decided to keep its Security and Payments division after the bids it received were not high enough.

Although Racal has never set a date for the flotation of Racal Telecom, the City had expected the business to be spun off in the summer of 1999. However, the absence of a chief executive means a flotation now looks unlikely before 2000.

Observers said Racal Telecom would also have to produce better revenue growth if it was to attract a high valuation. In the year to March the division reported sales growth of just 4 per cent, while profits fell to pounds 38.3m from pounds 43.7m as margins on key data communications contracts for the National Lottery and Railtrack were squeezed.

However, analysts said the delay meant Racal might become a bid target. Brian Newman, an analyst at the stockbrokers, Henderson Crosthwaite, said the sale of Data Communications had "removed the poison pill from Racal". He suggested that defence groups such as GEC and British Aerospace might be willing to buy Racal for its defence electronics interests before selling off Racal Telecom themselves. Henderson Crosthwaite estimates the division's value at about pounds 900m.

Meanwhile, Racal said it was in discussions with WorldCom about selling some of its fibre-optic cable to the US telecoms giant.

WorldCom, which recently announced the completion of a European network linking together several major cities, is keen to extend its network in the UK. Buying unused "dark fibre" from Racal Telecom would be cheaper than laying the cables itself.

However, David Elsbury, Racal's chief executive, said there was no suggestion that WorldCom was interested in buying Racal Telecom.

Mr Elsbury said the division would require capital spending of about pounds 150m over the next two years to upgrade certain parts of its network and extend its reach into major cities. That spending will take Racal's investment in the network to pounds 500m since it bought British Rail's telecoms division for pounds 132.8m three years ago.

The division is part of the Citylink consortium, which recently won the pounds 1bn contract to renew the radio communications system used by London Underground.