Pull-out to delay Trafalgar revival

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The Independent Online
TRAFALGAR HOUSE, which last week announced it would not be renewing its bid for Northern Electric, is likely to see still more cash haemorrhage from both its coffers and its market capitalisation in the wake of its embarrassing retreat.

City analysts predicted the shares could halve from their already low level of 43p before the company begins to recover, probably in mid-1997. But most observers welcomed the company's decision to stop wooing Northern and attend to its own wounds.

The company's come-uppance in the regional electricity battle was widely blamed on the collapse in its convertible preference share price from 93p to 73.5p, which raised the cost of financing a takeover. The fall followed an announcement in May that it had lost pounds 48m in the first six months and experienced a net cash outflow of pounds 248m.

Trafalgar House insisted on Friday that it still had the backing of its underwriters and could have gone ahead if a change in regulation had not made it unattractive. The new price cap imposed last month by the electricity regulator, Professor Stephen Littlechild, has not stopped three other bids for RECs being launched.

Capturing Northern would have bought time for Trafalgar by providing a steady cash flow and UK income to set against its advance corporation tax bill. Without that prize, it will have to concentrate on stemming its own losses.

Analysts said the new managers, many with links to its largest shareholder, Hong Kong Land, had already addressed the biggest problem: underbidding for large construction projects. More realistic quotes are likely to cost it market share, but will probably return the division to an operating profit. Because of the long-lead times on big projects, however, it could be two or three years before those gains show up on the bottom line.

The company has also refurbished its fleet of luxury liners, including the QE2, which had been allowed to deteriorate in the past.

While the market for top-price cruising is still sluggish, Cunard, its liner division, is reaping an unexpected benefit from the disastrous Christmas voyage by the flagship. The horror stories about passengers being besieged by plumbers and carpenters who had not finished their work seem only to have increased awareness that the refit took place at all. Travel agents say bookings for the liner are up.

Housebuilding could be more of a problem. The UK market appears to be falling again, and the decisions by Tarmac, Lovell, Costain and Mowlem to get out of the sector will leave little room for Trafalgar to dispose of its interests.