Sinking Trafalgar jettisons family jewels

Selling the Ritz is a low-water mark for a once-great firm, writes Tom Stevenson

There can be no better symbol of the depths to which Trafalgar House has fallen than the sale of the Ritz last week. Once one of Britain's leading conglomerates, only the direst of financial straits could have forced the disposal of such a uniquely prestigious trophy asset. Trafs is seriously on its uppers.

The disposal, to the secretive Barclay brothers, who also own the Howard Hotel, the European newspaper and a string of other high-profile investments, was hardly the anniversary present Nigel Rich would have chosen a year after he took up the chief executive's position at Trafalgar, even if the price he achieved was by any measure a full one.

It has been a stormy 12 months since he was installed by his former bosses, the Keswick brothers of Hong Kong's Jardine Matheson trading empire, which, through its Hong Kong Land subsidiary, owns a quarter of Trafalgar's shares.

During that time, Trafalgar has had to negotiate the PR gaffe of the century, when its Cunard subsidiary foolishly sent its flagship cruiser, the QE2, on a voyage to the Caribbean only half fitted out.

It has seen its bid for Northern Electric kicked into touch by the electricity regulator, Professor Stephen Littlechild, and lost almost two-thirds of its value on the stock market.

At 29.5p, the shares are just 2p above their lowest level since 1974, which was reached last week. The epitome of the 1980s boom share, they rose almost sevenfold during that decade under the flamboyant guidance of Sir Nigel Broackes. In the space of five years they have lost it all again and then a bit more.

Trafalgar is now valued at only a little over pounds 300m. That is about the same as Hazlewood Foods, half as much as MFI, a fifth the market value of Next. Any further fall and Trafalgar will drop out of the FT-SE Mid 250 index and into the SmallCap segment of the market.

What has gone wrong is easier to describe than to put right. Rapid expansion in the good years has left the company with a hotch-potch of assets in a range of industries whose only shared feature is lack of prospects - heavy-power engineering, construction, housebuilding and property.

Internal controls have been, by the frank admission of Mr Rich, totally inadequate for a company of Trafalgar's size and complexity. Trading is poor and cash flow worse.

Following the disposal of the Ritz hotel, attention now turns to what else Trafalgar can sell to reduce its debts of about pounds 250m. Although those debts are not massive in the context of its net assets, which stood at pounds 641m in March, there are serious doubts about the valuation of many of Trafalgar's assets in its balance sheet.

Serious write-downs of value when figures for the year to September are announced just before Christmas could wipe out much of the notional worth that underpins those borrowings, making gearing more of a worry than it appears now.

Speculation surrounds the fate of the Cunard line, which is underperforming its peers dramatically.

In the first six months of last year, when Trafalgar declared an unexpectedly large pounds 48m loss, shipping chipped in pounds 7m of red ink even before exceptional charges to do with the QE2's Christmas fiasco.

Comments from Mr Rich over the summer that it could be several years before the line produces a decent return suggest that a large write-off of its book value is likely in December. If Trafalgar still needs to raise money by disposing of assets it is, like the Ritz, an obvious "name" to put on the market.

The next two months will be crucial ones - for Trafalgar, for the reputation of Nigel Rich and for the Keswicks, who have made no secret of the fact that the company represented a European base for their empire following the takeover of Hong Kong by the Chinese in 1997.

Three years after they first boarded Trafalgar, they have poured more into the company in exchange for a 26 per cent holding than the whole company is now worth. As much as the financial loss, the investment represents a huge loss of face.

Talk to analysts about Trafalgar and the frustration is tangible. The company has always been short on information, a fault it is trying to rectify, but forecasting its profits is no easier now than before because so much hinges on the scale of the write-offs to come.

To make matters worse, with sales of almost pounds 4bn, the slightest movement in operating margin can generate a huge swing in profit (or loss). The City will be looking for an uncharacteristic openness about prospects and strategy when it next meets the company. The latest edition of the Earnings Guide shows a wide range of forecasts for the year just finished stretching from a profit of pounds 40m to a loss of pounds 75m.

When things are going as badly as they are at Trafalgar House it is amazing how easily you can chuck away the value of one of the world's great hotels.

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