Outlook: The importance of being a realist, Ernest

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The Independent Online
OVER THE years Sir Ernest Harrison has proved himself much better at selling businesses than running them. His crowning glory remains Vodafone. When the cellular telephone business was spun off from the Racal group in 1991 it was worth pounds 3.3bn. Today it is valued at pounds 37bn, even before Vodafone doubles in size by swallowing up Airtouch.

Now that he is reaching the twilight of his career Sir Ernest, 72, is keen to pull off one last deal that the City can remember him by and shareholders can thank him for. The disposal of Racal Telecom, however, is proving more of a problem than Sir Ernest bargained for.

It is now more than a year since Racal announced its intention to float the business after plans for a trade sale failed to solicit any offers above pounds 450m. Since then the Racal share price has powered ahead in the hope that Sir Ernest can reproduce some of his old magic.

But not much else has happened. Racal Telecom is still short of a chief executive and its trading performance remains pedestrian. Although the company still talks optimistically about a flotation this year, the timing could easily slip into the new millennium.

Now, however, there is a serious bidder back at the table. Dick Callahan, the former president of US West, has offered to pay Sir Ernest pounds 700m to take Racal Telecom off his hands. Mr Callahan's financial backers are impressive - his bid is being funded by Bank of America and GE Capital. Furthermore, Callahan Associates, the vehicle for the bid, has offered Sir Ernest a deal whereby he can retain up to half the business and thereby share in the upside once it is under more dynamic management.

Sir Ernest, however, has rejected the offer. He has one eye on the track record of Vodafone and the other on the stratospheric share price performance of Energis. On that basis, he reckons he can get more for the business.

There are some important similarities between Energis and Racal Telecom. While the Energis network is strung along the National Grid's electricity pylons, Racal Telecom got into business by snapping up British Rail Telecom, whose network is strung along the rail network.

But there are also some important differences. The sky-high rating of Energis owes much to its growth record. Under Mike Grabiner, it is expanding at a rate of 75 per cent while lucrative data traffic is doubling each year. In contrast, Racal Telecom's margins are falling and its growth rate is a sluggish 5 per cent. Moreover, many of the juicy contracts with train operators and Railtrack that were used to fatten up British Rail Telecom for privatisation are coming up for renewal.

Sir Ernest is spending this week with the institutions explaining why his strategy for floating the business remains the best course. It will not be an easy task. There is now a pounds 700m bid on the table and the chance for shareholders to gain from any upside in Racal Telecom. Furthermore, a trade sale of the telecoms arm could be the catalyst for the complete break-up of the group and the sale of the defence electronics business to BAe-Marconi or one of several European suitors. Sir Ernest has defied the odds before. But on this occasion, investors need to ask him some hard questions.