View from City Road: A gem of an idea from Charter

SOONER or later Charter Consolidated had to do something about its image as a cash-rich, passive holding company.

In particular it had to address the question of its 38.4 per cent stake in Johnson Matthey, which chips in about one-third of Charter's pounds 70m-plus annual pre-tax profits but no operational cash flow beyond a likely pounds 7m net dividend this year.

The sprawling Oppenheimer family interests - which, through close relative Rustenburg Platinum, have an exclusive marketing contract with JM and, through Minorco, are the largest shareholders in Charter - are seen to be in need of cash.

The problems for the Oppenheimers are low precious metal prices and a big bill round at De Beers, another family concern, to support the diamond market.

Analysts were quick yesterday to speculate that current negotiations to sell Charter's stake in JM, worth pounds 350m, could kill two birds with one stone.

On this view Charter would buy out Minorco's 36 per cent stake in itself for around pounds 250m. The cash would be passed up to De Beers as Minorco bought out the diamond producer's holding in itself.

The implications for Charter of a buy- back of the Minorco stake are quite significant. By putting the JM cash on deposit Charter would dilute its earnings, on Nomura's forecast of pounds 80.5m pre-tax in the year to March 1994, by 5 per cent.

But purchase of the Minorco stake, although reducing pre-tax profits to pounds 59.5m, would boost earnings by 10 per cent.

Thoughts of this kind, and the prospect of a pounds 230m or 220p-a-share book profit on the JM stake sale, helped the Charter share price 14p higher to 663p.

Such speculation may be too neat. Charter could use the sale proceeds, added to its pounds 150m cash pile, to make a substantial acquisition either in its own field of managed businesses or in a related area.

But while Charter, after market outperformance over the past year, stands on a market rating, the standing of JM, where David Davies is chairman, would look less assured following the sale of Charter's stake to supposedly friendly buyers - Rustenburg has been tipped to take 29.9 per cent.

For JM it would be business as usual, but in the absence of immediate bid hopes a multiple standing at a one-third premium to the market, after a 19p fall to 494p, may be hard to sustain given distinctly average short-term earnings prospects.

(Photograph omitted)