THE INVESTMENT COLUMN

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Reed launches pounds 1bn paper chase

Investors warmed to Reed Elsevier's announcement yesterday that it was seeking offers for its consumer publishing interests for up to pounds 1bn. The prospect that the proceeds will be redirected into the more lucrative electronic and business publishing divisions helped the shares gain 25p to 948p.

Reed's other interests have undoubtedly been more profitable than the regional newspaper operations and the hit-and-miss book publishing business. The company has also proved since the late Eighties that it can grow successfully through acquisition. Piling up another pounds 1bn, in addition to its already healthy cash position, would mean more money to spend on high-performance assets. Reed's management has shown it knows how to select.

The three most recent buys, Editions Techniques (pounds 76m), Official Airline Guide (pounds 277m) and the electronic publishing giant Lexis Nexus (pounds 1bn) were swallowed effortlessly. No acquisition since 1987 has led to earnings dilution.

The caveat is that while there are a growing number of sellers of regional newspapers, buyers are thin on the ground. Despite Thomson's sale of its non-Scottish titles last week, there are few companies like the buyer Trinity around. Only the big national newspaper publishers could contemplate a purchase as big as the whole of Reed's regional newspapers, but almost certainly they would face insurmountable regulatory difficulties. A few are likely to sniff around anyway, especially the Mirror Group and Associated Newspapers. Regional publishers are more likely to cherry-pick the best titles, with Emap, Midland and perhaps even Trinity adding to their portfolios.

These considerations mean the auction will probably last several months and may not throw up the kind of premium offers Reed would prefer. Some analysts are already warning that the pounds 1bn price tag attached to the whole disparate clutch of businesses, including book publishers, Dutch newspapers and a small number of US consumer magazines, might be difficult to reach.

Whatever the outcome, Reed is likely to be able to find a better home for its money. The bet is on further expansion in the US or on the Continent. High-margin scientific and business publishing, especially the electronically distributed kind, will be the acquisitions of choice.

With some carefully judged purchases to replace the consumer businesses, Reed Elsevier is likely to be able to deliver firmer results in coming years. That would justify a forward price-earnings ratio of nearly 20, based on earnings expected to reach 50p a share this year.

Drinks group ends dry run

Matthew Clark has come a long way in six years. In 1989, the drinks group was on its knees, reeling from the loss of a highly profitable distribution contract for Martell Cognac brandy.

The ending of that business saw the company's stock market value plunge to pounds 23m, and many predicted the end of Matthew Clark's independence. The Cassandras, however, could not have been more wrong. Peter Aikens, the chief executive who joined amid the worst problems in 1990, now presides over a more diverse company valued at almost pounds 300m.

Investors have been well served, despite having to dig deep into their pockets to fund an ambitious pounds 169m expansion programme. That has brought on board the Grants of St James's wine business, Freetraders, a wholesale operation, and the Gaymer's cider and Babycham group.

But even without further big acquisitions, yesterday's results suggest that the company should continue to do well for a couple of years at least.

Profits before tax and exceptional charges for the year to 30 April more than doubled from pounds 10.3m to pounds 21.m, despite the inclusion of just six months' trading from Gaymer. They were, however, flattered by comparison with the previous year's result, which included only 10 months of Freetraders and six months of Grants.

Barring acquisitions, this will be a year of consolidation. Most of the pounds 32.7m exceptional charge in the latest figures relates to sorting out the previously mis-managed Gaymer, and the benefits of that work should start to come through.

There is speculation that a large distribution contract for Allied Domecq's pub estate is close to being signed, which would probably lead to analysts rethinking 1995/96 forecasts, currently pounds 33m for profits and 48.5p for earnings.

The shares, which have outperformed the market by 5 per cent this year, eased 2p to 623p on some profit-taking yesterday. They trade on a prospective p/e of around 13, and the forecast yield is 4.8 per cent. Worth picking up.

VHE bogged in Black Country

VHE Holdings, the land reclamation specialist, has emerged as one of the walking wounded from a string of less-than-spectacular new issues launched since the latter part of 1993. The placing at 115p raised pounds 10m for the founder and chairman, Brian Waldron, and Brian Thomson, chief executive, but the shares have struggled to stay above the flotation price since then.

They plunged in April after it warned that the worst rain for 50 years would hit profits. Yesterday, the price hit a new low, dropping 20p to 70p, after VHE announced that the sudden worsening of a dispute over a big contract had forced it to pass the final dividend.

The job, involving VHE as sub-contractor to the Kier construction group to clean up 50 acres in the Midlands for the Black Country Development Corporation, has turned out much bigger than expected. Originally worth pounds 5.5m, VHE claims a series of variations has made the cost several times that sum. The BCDC is contesting the demands and its own claim for liquidated damages is already running at over pounds 1m.

Based on legal advice, VHE is confident of its position and has booked pounds 4.4m from the contract in total turnover for the year to March. Pre-tax profits fell from pounds 3.76m to pounds 3.07m, in line with the reduced expectations, but the outlook is decidedly uncertain.

Gearing has leapt to over 60 per cent, even assuming that the pounds 4.4m is recoverable. On the best assumptions, the dispute could take a year to sort out, with VHE being forced to fund the contract in the meantime. Steer well clear.

Company Results

Turnover P/Tax EPS Dividend

AIM Group (F) 32.8m(33.2m) 33,000(1.0m) -0.2p(4.2p) 3p(3p)

Central Motor Auctions (I) 5.6m(5.2m) 205,000(-420,000) 0.9p(-3.1p) 0.5p(0.5p)

Coal Investments (I) 11.1m(24,000) -18.3m(-2.1m) -28.1p(-13.6p) -(-)

Creighton's Naturally (F) 8.5m(9.05m) 1m(1.1m) 13.9p(14.2p) 5.5p(5.5p)

Matthew Clark (F) 299.3m(173.7m) -11.35m(10.3m) -29.7p(31.8p) 13p(9.1p)

VHE Holdings (F) 23.6m(26.1m) 3.1m(3.8m) 6.3p(8p) -(3.8p)

(Q) - Quarterly (F) - Final (I) - Interim

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