Bottom Line: Charter 'bargain' purchase still to be proved

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The Independent Online
THE CITY has been waiting for an acquisition from Charter for so long that virtually any deal which used up some of its low-yielding cash would have been seen as good news. Even so, yesterday's 51p rise in its share price is more enthusiastic than even the company had dared to hope.

Charter does seem to have got a bargain. While Esap lost money after tax last year, the current year forecast of Skr300m ( pounds 27m) looks achievable given its performance in the year to date. That makes a return to peak profits of pounds 40m in 1995 a less demanding target.

But that raises the question of why Incentive, the current owner of a 43 per cent stake, wants to sell now - particularly at the relatively modest multiples those forecasts imply. The explanation that Incentive and its parent want to concentrate more on pharmaceuticals sounds plausible enough, but the timing means its motive will remain suspicious until Charter has proved the deal's worth.

Jeffrey Herbert, Charter's chief executive, makes no pretence that there will be synergies from the deal. It wanted a fourth leg to the business, ideally in industrial manufacturing with a world-leading position. In Esap it has got that. Charter believes there is still scope for restructuring and cost- cutting despite the pounds 20m already spent by Esap, and hopes to expand its businesses into other markets - notable eastern Europe.

Forays overseas by British companies have, however, a distressing tendency to go wrong. Shareholders can take some comfort from the fact that Charter is used to managing international operations, but it has little experience of acquisitions.

The largest recent deal - Hargreaves Quarries - was bought for an inflated price at the top of the British construction cycle.

Nomura is expecting that deal to lift earnings by 4p to 41p this year and 6p to 52p next. That puts it on a premium 16 times multiple for this year, falling to 14 times next. If Esap lives up to its promise that may be a bargain. More cautious shareholders will want evidence of performance first.

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