Scottish Telecom offers Racal a partnership

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The Independent Online
ScottishPower is hatching plans to expand its telephones business south of the border, with an offer to turn Racal's telecommunications operations around.

But as Chris Godsmark, Business Correspondent, reports, the multi-utility is not prepared to launch a full-scale bid to buy the Racal division.

The approach to Sir Ernest Harrison, Racal's chairman, would form part of an ambitious plan to give ScottishTelecom, ScottishPower's telephones business, a bigger foothold in the English and Welsh phones market. Racal has appointed Merrill Lynch, the US investment bank, to seek partners or a buyer for Racal Telecom and two offers are now known to have been made by the deadline for expressions of interest, which expired last month.

They present Racal with the choice of a firm buyer, in the form of Duncan Lewis, the former head of Mercury and senior Granada executive, pitted against ScottishPower, which is seeking a partnership without paying cash for a direct shareholding. Mr Lewis, backed by Schroder Ventures, is thought to be offering around pounds 400m to buy the whole of Racal Telecom.

ScottishTelecom has built up a long-distance network in Scotland by running telephone lines along its electricity wires in the same way as National Grid's Energis operation. Since May it has expanded into the residential market in Edinburgh, using fixed wireless technology similar to Ionica, with 7,750 customers connected by the end of September.

Ian Russell, ScottishPower finance director and chairman of ScottishTelecom, has set a target of capturing 10 per cent of the pounds 2bn Scottish telephones market by 2000. The pace of growth at ScottishTelecom has surprised the industry. It is poised to earn revenues of around pounds 110m this year and, unlike Energis, is making a profit.

A partnership with Racal would give ScottishTelecom access to a long- distance network across the UK and lucrative contracts to supply telecommunications services to Government departments. Racal Telecom expanded in 1995 with a pounds 130m takeover of BRT, the old British Rail telephones business which runs wires alongside railway tracks.

However the cost of a full-scale takeover of Racal Telecom has apparently been ruled out by ScottishPower, which is still digesting its pounds 1.7bn purchase of Southern Water last year. The multi-utility group, which announced its results yesterday, had debts of pounds 1.7bn at the end of September, boosted by its higher-than-expected pounds 317m windfall tax provision.

Profits before exceptional charges in the six months rose by 44 per cent, to pounds 240m, helped by the contribution from Southern Water. Including the windfall tax, ScottishPower revealed losses after tax of pounds 133.6m, the first since privatisation.

Meanwhile ScottishPower yesterday pledged to unveil two more marketing alliances for its domestic gas business on top of a recent link-up with the Automobile Association. The new alliances were also likely to be with affinity groups like the AA, though ScottishPower declined to give details.

The company said it had signed up 55,000 domestic gas customers in Scotland since competition began last weekend, a much lower figure than the 200,000 claimed by Eastern Group, despite ScottishPower's stronger brand identity.