View from City Road: Vickers faces hard choices

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The Independent Online
VICKERS' failure to win Kuwaiti orders for its Challenger tank is bad for Britain, but worse for Vickers and Sir Colin Chandler, the chief executive. It casts doubt on the quality of the tank, the medium-term viability of one or other of the company's two tank factories and, most importantly, on the company's financial strength. Vickers may feel the need to raise cash from disposals.

The real significance is cash. The beauty of a large defence contract - the Kuwaiti order would have been worth about pounds 1bn - is that it brings in a large upfront payment. Just as British Aerospace is benefiting from advance payments under its huge Saudi contract, Vickers was hoping for help from Kuwait to see it through harsh times.

The loss could not have come at a worse time. The company has just announced 950 redundancies at Rolls-Royce after a slump in luxury car sales. The cost of rationalisation at Crewe will be pounds 12m, incurred in the second half. Even after these cuts, the Rolls Royce subsidiary will still be in loss unless there is an upturn, raising the possibility of yet more job losses next year.

As a result of these problems borrowings are rising from 22 per cent of shareholders' funds to an expected 45 per cent by the year-end. This is far higher than the company is comfortable with.

An advance payment from a tank buyer would have been timely. While there is still hope of orders from Oman, Abu Dhabi, Saudi Arabia and Sweden, they are likely to take months, or years, to materialise. The company needs orders within the next 15 months before it has to rationalise the Newcastle or Leeds factories, each with 800 workers.

It will have to take tough decisions on disposals sooner than that. The two obvious candidates are the medical equipment and marine engineering divisions, making infant incubators and stabilisers for liners respectively. A sale would be no part of the group's stategy but, having already cut the dividend, it may feel it has little choice.

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