Investment Column: A high price for Premier Farnell

Premier Farnell, now the world's biggest catalogue distributor of electronic bits and pieces, provides a classic case study of the pitfalls of paying over the odds for a big acquisition in another country at the top of the cycle. The pounds 1.9bn takeover of US rival Premier was being criticised on all those grounds almost as soon as it was announced early last year. Since then the group has seen a drop-off in the market for semiconductors, been hit by adverse exchange rates and rounded off its litany of woes in January this year with a hammed-up profits warning.

In themselves, none of these is that serious, but together they add up to a substantial shortfall on expectations at the time of the Premier deal. Stripping out the pounds 43.3m gain on the sale of Farnell Electronic Services and pounds 7.7m of Premier rationalisation costs, the combined underlying business saw its profits rise from pounds 111m to pounds 137m, some pounds 23m below the original forecast.

The shares have slumped from a high of nearly 750p reached at the end of December to 500p, below last year's 540p rights price. Even after yesterday's 1p uptick, it is clear that Howard Poulson, the chief executive, and his team have a wall of credibility to climb.

To be fair, there were no more nasty surprises in the latest figures and management appears to have kept its eye on the old Farnell business during the distractions of the Premier integration. Profits there grew from pounds 45.6m to pounds 50.5m, reflecting organic growth of close to 9 per cent. The slight margin drop to a still healthy 24.3 per cent represents investment in the new Industrial catalogue, a new departure for the group into parts and tools for wider industrial use.

More difficult to judge is the state of the old Premier operation. Certainly the pounds 89.3m contribution for 42 weeks with the group and operating margins of under 21 per cent look a poor return on the group's investment. Year- on-year profits are said to be up 7 per cent, but mainly because of the pounds 6m annualised cost savings squeezed out following the takeover.

However, it is early days yet to judge the benefits of merging Farnell's higher-margin catalogue with Newark, Premier's wider-ranging catalogue offering. A new US edition of the Farnell catalogue, now rolled out to around a third of Newark's customers, is showing promising early results, with annual sales running at $15m so far. The plan is eventually to take Newark to continental Europe.

But Mr Poulson still has his work cut out. The reduction in net debt received a one-off boost from the sale of FES and the sub-5 per cent market growth rate last year is showing only sluggish signs of picking up. So on an admittedly bearish forecast of pounds 159m for the current year, the shares still stand on a highish multiple of 16. Unexciting until sentiment turns more favourable.