pounds 1.9bn Premier buy to propel Farnell into Footsie

Click to follow
The Independent Online

City Editor

Farnell Electronics will sweep into the Footsie index this spring after an ambitious US acquisition, one of the least well-known companies to have joined the ranks of Britain's largest companies. The deal, the price of which raised eyebrows in the City and knocked almost 10 per cent from the shares, will triple the size of the Wetherby-based electrical component distributor, giving it a market value of almost pounds 3bn.

The purchase of Premier Industrial Corporation, also a component distributor, was first negotiated by Railtrack boss Bob Horton, a non-executive director of Farnell since last year and a long-time friend of Mort Mandel, the 74-year old chairman and chief executive of family-controlled Premier.

After the deal, the renamed group will change its name to Premier Farnell.

The deal is the latest and largest move by Howard Poulson, chairman for the past three years, who described the Premier acquisition as "a once- in-a-lifetime opportunity". Mr Poulson, who inherited a group that had grown profits without pause for almost 30 years, has dramatically accelerated the company's growth and news of the acquisition was accompanied by the promise of 21 per cent growth in profits for the current financial year, which ends on Sunday.

Farnell will pay pounds 1.85bn for Premier, part-funded by a nine-for-19 rights issue at 540p a share, raising pounds 349m, and the issue of 69.4 million ordinary shares and 27.9 million convertible preference shares. Farnell's pounds 70m cash pile will be wiped out and replaced by net debts of pounds 450m.

Analysts thought the price paid, representing 26 times Premier's after- tax earnings in the year to last May, was high, although they agreed with the commercial logic of a merger that will create large economies of scale. Unlike many of Farnell's recent purchases, Premier is not an underperforming business and increasing its return on sales to Farnell's impressive levels will not be easy.

Other worries included a possible overhang of stock from the Mandel family stake, 25 per cent of the fully-diluted capital of the enlarged group. Various agreements are in place to create an orderly withdrawal if the Mandels decide to cash in their holding, but analysts agreed that the deal may stall Farnell's remarkable share price rise over the past five years. The shares shed 62p to close at 617p.

Farnell and Premier sell components through catalogues and generate strong cash flows and margins by charging a premium price in exchange for a high- quality, fast service.

There is little overlap in terms of products and suppliers and much of the benefit of the deal will come from pushing each other's products to existing customer bases.

Like Farnell, Premier enjoys an unusually high margin for a distribution business, about 20 per cent in its biggest operation, Newark Electronics.