Bottom Line: Forte's first step on a long road

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The Independent Online
BY FLOATING its airport services division Forte has taken a small step in the right direction as it grapples with debts of pounds 1.3bn. But the key word is small.

Presumably Forte has turned to a listing because it could not get the sort of price it hoped from a trade buyer, as happened with Gardner Merchant, the contract catering operation, which eventually went to a management buyout.

But there must be a question mark over whether this is the right time in the economic cycle to be selling assets to reduce gearing - particularly as airline catering could contribute pounds 22m, or about a fifth of profits, next year. Forte will have to work hard to avoid dilution.

Preliminary City estimates suggest it could raise as little as pounds 120m- pounds 130m from the sale, so the interest saving could be less than half the profits forgone. Even with depreciation and savings on capital expenditure, it is hard to see how Forte can break even on the deal, unless the more optimistic estimates of up to pounds 230m prove achievable.

The deal will cut gearing from the current 47 per cent to around 40 per cent, comfortable enough at this stage in the cycle. That should remove the City's lingering worry about a rights issue and means Forte need not be rushed into more asset sales.

Despite being wrong-footed by recession, Forte remains a solid company with a good management, but it still has much to do if it is to justify its premium rating. Based on forecasts of pre-tax profits of about pounds 90m for the year to January, its shares - down 5p at 222.5p yesterday - are on a prospective multiple of 36.6, coming down to about 27 next year. With doubts creeping in about whether recovery really is feeding through into the hotel sector, it all looks rather optimistic.

Forte is hoping to make about pounds 500m of disposals over the next two to three years, as it concentrates on core hotel and restaurant businesses. About 30 UK hotels are for sale, and another 20 in the United States. It is also looking for another buyer for Harvester, the restaurant chain, now that Whitbread has turned up its nose at the rumoured pounds 120m price tag. If it really wants to restore confidence, it should get on with these sales.

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