Racal moves to calm fears with news of pounds 2bn link-up

Racal Electronics yesterday sought to stem shareholder discontent after Monday's disastrous profits warning by announcing an agreement to join with a rival defence constortium to bid for a pounds 2bn British army radio contract.

However Sir Ernest Harrison, the company's chairman, failed to discount speculation that he was considering retiring from the group he has managed for the past 30 years. Asked whether it was time for him to leave his job at the age of 70, he said: "The whole question of succession is always under review." He declined to be drawn further on any firm plans.

Sir Ernest was launching a fierce defence of his strategy after the profits warning on Monday which stunned investors and knocked 18 per cent off the company's share price. Describing Racal as a "super" company and a "tremendous success," he totally rejected accusations that the management had been wrong-footed by delays to contracts in its Radio Communications division. He continued: "The businesses are not going wrong, they are going well."

Directors also insisted that the first time they had heard about the problems with the contracts, which would be worth some pounds 30m to Racal's sales this year, was at a scheduled board meeting last Friday. Sir Ernest said the radio business was "more supervised than any other activity in the company."

He revealed that Racal had agreed to team up with ITT Defence of the US to jointly bid for the pounds 2bn Bowman contract to replace the British Army's battlefield radio system. Racal had been in partnership with Siemens Plessey in a team called "Yeoman" to bid for Bowman, billed as the largest UK military communications programme ever, with ITT as the remaining rival bidder left in the race.

However both Racal-Plessey and ITT have become increasingly frustrated at delays by the UK Government in placing the order. The Ministry of Defence recently announced that the production contract had slipped further, from 1998 to 1999.

A joint bid with ITT needs approval from the Ministry of Defence, though David Elsbury, Racal chief executive, pointed out that the Yeoman consortium had already spent pounds 35m in research and development work. "It's difficult to be enthusiastic and support those R&D costs," he said.

However he claimed that a tie-up with ITT would give the combined operation more than two thirds of the global defence radio market, worth around pounds 500m a year. If the MoD approves the link-up with ITT, it would go some way to restructuring Racal's radio division, which is currently the subject of a strategic review.

The news about Bowman helped Racal shares to recover a little of the ground they lost on Monday, rising 11p to 236p. They had closed at 275p last Friday.

Racal yesterday confirmed that its half-yearly profits had fallen by 30 per cent to pounds 21.2m after a pounds 10m charge for restructuring its Data products operations. The profits warning had earlier estimated that earnings for the year as a whole would be around pounds 50m, compared with pounds 70.4m in 1995.

However speculation that Sir Ernest is to retire would be likely to raise further doubts about Racal's long-term direction. He joined the company in 1951 as company secretary and financial accountant, gaining a seat on the board 10 years later and becoming chairman in 1966.

In the years that followed Sir Ernest became the acknowledged "king" of shareholder value, delighting investors with his demerger policy, which saw Vodafone and then Chubb, the security business, hived off into separate businesses.

After massive growth in the mobile phone market, Vodafone is now worth pounds 7.9bn, while Chubb, with a market value of some pounds 930m, is also worth more than what remains of Racal.

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