The Investment Column: Thorn demerger may not pay off

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The Independent Online
Demergers, the fashionable thing to do these days with unfashionable old conglomerates, are meant to unlock and enhance hidden shareholder value. That's not immediately apparent in the case of Thorn EMI.

Some pounds 70m was spent on fees and an inordinate amount of senior management time was spent on the minutiae of unbundling the EMI music business from Thorn's rental activities, yet the stock market has given both a cool reception.

Upon demerger, Thorn EMI's shares stood at pounds 18.33; today the sum of the parts is worth less than pounds 16, representing a pounds 1bn loss in stock market value in just three months. Thorn has been particularly hard hit. Offered at 408p, the shares have been in virtual free-fall, partly due to worries about US litigation. They dropped a further 34p yesterday to 313.5p as Thorn warned on a sudden downturn in its US rentals business and start- up delays in the UK. It also unveiled a pounds 32.9m one-off charge for 180 stores that reverted to Thorn when the German computer retailer Escom collapsed.

Thorn charges customers an annual interest rate of up to 30 per cent for renting a television or video, but its chief executive, Michael Metcalf, claims its rentals business is less exposed to the vagaries of the economic cycle than its retail peers.

That's certainly evident in the UK, where booming high street retail sales have not fed through to the flagship Radio Rentals chain or the more downmarket Crazy George concept.

UK operating profits fell by more than pounds 1m to pounds 34.4m, though the shortfall was blamed on the cost of rolling out Crazy George, which is aimed at the estimated one in four households in the UK earning less than pounds 10,000 a year. Return on sales was also lower due to the delayed start-up of Thornlink, a new national call centre handling customer inquiries which won't be on stream until next autumn.

Why the US Rent-A-Center business has suddenly fallen off a cliff is less clear. True, major consumer electronics retailers there are seeing significant like-for-like sales declines, but Thorn, as Mr Metcalf insists, is meant to be relatively immune from that sort of thing. Whatever the reason, US store sales are expected to show a "modest decline" over the full year after a "disappointing three months to September".

Mees Pierson has cut its 1997 forecast for pre-exceptional profits by pounds 12m to pounds 180m, and shaved pounds 18m off its 1998 number to pounds 192m, putting the shares on a prospective PE ratio of 11.

The lesson from yesterday's share price collapse is that fundamentally dull companies cannot afford to spring nasty surprises on shareholders. With double-digit earnings growth rates fast becoming a memory, the discount rating to the market is more than deserved.

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