Outlook: Energis/Racal

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ONCE UPON a time two companies decided to string long-distance telephone networks alongside their real businesses. One was called National Grid and the other was called British Rail. Then along came a handsome investment banker and told them there were riches beyond the dreams of avarice to be made in telecoms and thus were born Energis and Racal Telecom. The two have had rather differing fortunes.

For a company which makes no money, Energis has been a wonderful business for investors, increasing in value sixfold since the Grid decided to cash in on its luck two years ago and float the group. It now has sales of pounds 300m and a market capitalisation of pounds 5bn.

By a stroke of coincidence Racal Telecom has about the same level of sales but is valued at only pounds 750m. It is also about to be acquired by Energis, using the latter's highly valued paper. The gulf in valuation is explained by the less than stellar growth record of Racal Telecom, which pales beside the 75 per cent annual increase in revenues achieved by Energis, and its general lack of management. It does, however, have a long list of government clients in defence and elsewhere that Energis would love to get its hands on, as well as a presence in Scotland and Wales.

Should the deal go through, Energis will double in size overnight. However, it will still be entirely a UK-based business. Unlike the other telecoms stock market fresher, Colt, it lacks presence both overseas and in the local loop. Still, it is probably the kind of deal Energis needed to do if it is to have a chance of staying independent. When the elephants of the telecoms industry dance as they have started to, it is trample or be trampled.