Farnell investors revolt over pounds 1.8bn bid

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The Independent Online
COMPUTER parts distributor Farnell Electronics is facing a shareholder revolt this weekend over bitter City opposition to its pounds 1.85bn takeover of Premier Industrial Corporation of the US.

The ambitious deal, agreed last week, would catapult Farnell into the FT-SE 100 index of leading UK firms with a market value of pounds 3bn, but it already faces a nearly unprecendented degree of dissent.

The bid, for a US business twice its size, promptly wiped 10 per cent off its share price after a pounds 1.3bn issue, and there are fears that Farnell might join a long list of UK names in the US corporate graveyard.

As one institutional shareholder said: "Companies making huge acquisitions frequently get it wrong. Those making huge acquisitions in America often get it badly wrong. So naturally we have worries."

The move would make Farnell the biggest electronics components distributor in the US and third largest in the world, but the broking community is also far from impressed.

"This deal is quite extraordinary. It amounts to a reverse takeover, and I can't see what UK institutional shareholders and investors are getting out of it," said James Heal, analyst at ABN-Amro Hoare Govett.

"On my numbers, there will be earnings dilution between now and the year 2000. Shareholders will see their stakes diluted by 40 per cent," he added.

Mr Heal forecasts that earnings per share for the year to January 1997 for the merged business will reach 38.2p, instead of 43.6p if the deal is thwarted. A year on, the enlarged Farnell would generate 46.1p, instead of 50.1p.

Farnell now faces a showdown with shareholders when it seeks their approval at an extraordinary general meeting scheduled for 15 February at its headquarters in Wetherby, Yorkshire.

If the deal goes through, its largest shareholder will be 74-year-old Morton Mandel, Premier's chairman and chief executive. His shareholding will be 25 per cent, giving him a significant degree of control. Mr Mandel will join the enlarged Farnell business (which is to be renamed Premier Farnell) as its executive deputy chairman.

Farnell is paying 24 times prospective earnings for Premier, seen as high by critics. "This reinforces the belief that it is difficult to get a bargain in the US," said one institutional investor. Despite a rights issue, debt will soar to pounds 450m while net assets will be negative after a huge goodwill write-off. "Banks are unconcerned about this," said Howard Poulson, Farnell's chief executive. "Interest cover will be in excess of six."

According to Mr Poulson: "No one faults the industrial logic. But it comes down to one of price. Our view is that we are not overpaying. It can accelerate our earnings per share growth. We are comfortable with the deal over the longer term."

North America has often been a deathbed for British companies investing there without their own managements taking control. Those to trip up include BT, Redland, BPB, Barratt Developments. The worst example was Ferranti, whose takeover of International Signal and Control led to its collapse.

Retailing disasters are even more common with Ratners and Dixons among them. Mr Poulson countered: "We are not going into the fashion business. There are plenty of companies that have been successful over there such as Siebe and Hanson. We are not dependent on any one individual or sector. We will be satisfying a large number of customers and markets." Last year, Farnell opened a small greenfield operation in the US.

Margins are one area in which Farnell reckons it can make a difference. In distribution, it achieves margins of 27 per cent, well ahead of Premier's 20 per cent. Farnell also hopes to generate extra sales by plugging its UK catalogue into Premier's customers. "The warmth coming back from suppliers has been tremendous. The industry is generally supportive of the deal," Mr Poulson said.

There are no "golden handcuffs" tying in key executives, so if they do not like the deal they can leave. But Mr Poulson said it would be impossible for a new rival to enter the market as set-up costs are so high. Even so, Premier faces more market competitors in the US than Farnell faces here.

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