Fast Rewind For BET
BET’s plan to exchange colour televisions for cabinet towels chimes oddly with the enthusiasm which the group was expressing about television receivers when it bought out the Rediffusion minority last year. BET paid heavily for that stake and is now selling the rental business after a year of depressed profits and just before the cash flow benefits of the earlier VCR investment start to emerge.
Yet BET has good reason to feel more sceptical about the rental market than it did a year ago. It,s own VCR off-take has been virtually nil over the past quarter and the shift from rental to outright ownership looks inexorable across the whole product range. Under lying the gloom about the market, however, must be a recognition on BET's part that it is simply not very good at managing the Rediffusion rental business. Granada extracts roughly twice the profit from little more retail space and not all of the difference can be attributable to cable, product mix and location of outlets. BET will escape on a multiple of roughly 20 times historic earnings, which looks respectable value for arguably the least distinguished company in the sector.
The acquisition provides Granada with the challenge of dragging Rediffusion margins into line with its own, besides offering an immediate saving in overheads and the prospect of greater sales density through the closure of around 100 outlets. Marrying the two companies without disturbing the customer base will be no easy matter and Granada will almost certainly suffer some short term earnings dilution but, for a group which seems rather to have lost it's way on the diversification path, there is much to be said for a return to basics.
The purchase does, in any case, leave Granada well hedged since the television rental operations will spin off cash a few years from now, come what may.
In the short term, profits can be massaged slightly through a revision of Rediffusion’s depreciation policy and, by the late 1980s, Granada should be attractively liquid. Yesterday’s share placing, which will reduce net debt from 52 to 35 per cent of net worth, can therefore be seen as a deferred one-for-two rights issue. The fact that Granada executed such a heavy issue on a narrow discount in
a market like yesterday’s probably owes something to the intriguing cocktail of rights issue and placement, not to mention the long overdue enfranchiseiment of Granada’s limited voting shares. While Thorn EMI's dominant position in the TV rental market may encourage the Office of Fair Trading to overlook this particular deal, it is by no means sure that BET's parallel proposal to acquire the residual stake in Initial will meet the same fate.
The Monopolies Commission was distinctly ambiguous about the Initial/Advance combination last year and it can now be only a matter of time before BET seeks to mop up the Advance minority. The premium being offered by BET looks reasonable but the independent directors of Initial may easily conclude that a few pence more can be extracted, 0FT permitting.
BET Springs £287m Dual Deals
Reorganisation at British Electric Traction took a dramatic leap forward yesterday as the group snapped in a surprise
£167 million bid for the 59 pc. outside shareholding in Initial, the laundry services group, and agreed to sell its 400-shop
Rediffusion T V rental business to Granada for £120 million and a share of future profits.
"We are selling a major operation which is very mature to say the least and substituting a high quality business, excellently managed, right in the middle of our main area," declared BET chairman Hugh Dundas.
Granada chairman Alex Bernstein argued in contrast that the TV and video rental market “has a long way to go,” adding: “We are more optimistic than they are.”
BET is offering four shares plus £16 for five Initial, worth 520p per Initial share with BET unchanged at 250p yesterday.
That values the 59.3 p.c. outside interest at £161 million and the whole of Initial at £233 million.
The group also owns more than 80 p.c. of Advance Services whose shares added to 75p, but Mr Dundas said no decision would be taken on the outstanding minority until these deals had been completed.
BET estimates pre-tax profits to March 31 to be not less than £85 rnillion against £70 million last year and a final dividend of 9.75p a share is to be paid, making the total 12p (l0p).
To help pay for the Initial deal BET is selling its Rediffusion rental shops to Granada, which itself has 450 shops, for £120 million plus a 20 p.c. share of all profits of the combined rental business that exceed £45 million a year in the 4 years to September 1988.
In the year to March they were £375 million, with Rediffusion’s profits at £12.7 miIljon.
Granada will expand, its capital by a third to pay for the deal, placing 78 million new shares at 155p against a market price 13p down at 163p. Granada’s own shareholders may opt to buy the new shares, which will be recalled from City instiutions.
Granada will also be enfranchising its restricted-voting “A” shares offering Ordinary holders a one-for-1O bonus in compenstaion.
Granada also announced interim pre-tax profits of’ £24 million in 28 weeks to April 14 against £21 million last time.
It will pay a 2.3p (2.Ip) interim net dividend and plans a final of 4p, making 63p (5.8p) total.
As well as obtaining OFT clearance, both sets of share holders need to approve the deals, Special meetings will be called.
Rental Chains Fight To Keep Public Tuned In
Too cheap televisions, too many shops and too many service engineers, complained British Electric Traction when it threw in the towel for its television rental business yesterday. But Granada, which is buying BET’s Rediffuslon TV rental business, thinks it can have bigger and better shops as a result.
However, the television rental chain which will emerge from the combination will still be substantially smaller than Thorn EMI’s extensive television rental operations which include DER, Radio Rentals, Multibroadcast, Focus and Rumbelows.
Granada will have about 850 outlets after buying Rediffusion’s television and video cassette recorder rental business, of which about 100 will be closed as a result of rationalisation. By comparison Thorn. EMI has over 1,100 rental showrooms and rents television sets and VCRs through Rumbelows, its retail electrical chain.
Granada and BET, which owns Rediftusion. estimate that the combined group will have about 20 per cent of the rental market in the UK compared with Thorn EMI’s 31 per cent. The other major party in the business is Electronic Rentals which owns the Visionshire chain and has about 10 per cent of the market. In the mid-1970s about 70 per cent of colour television sets were rented, Since then the proportion of rented sets has been falling, but new products such as television sets with teletext and, more important, VCRs. have retained the British public’s enthusiasm for renting.
The strength of the British rental industry was probably the largest single reason for the extraordinarily fast acceptance of VCR’s in the UK. In 1982 Britain bought or rented more VCRs than the rest of the European countries put together,
In spite of the boom in demand for VCRs. the business has been having to face longer term problems. The biggest is that the advantages of rental over purchase of a staple product like a colour television set are now minimal.
The cost in real terms of colour television has fallen steeply over the last 10 years and their reliability has increased tenfold over the same period. The reason is that the number of components in a colour television has substantially reduced by the growing use of integrated circuits. Japanese competition has also forced all companies to improve quality control which had been notoriouly bad.
The abolition of hire purchase restrictions in 1982 has made it as easy to purchase a television set as to rent one. In addition. some of he leading retailers have introduced five year guarantee schemes to compete with rental. The result is that now only 43 per cent of colour television sets are rented.
Last year the number of television rental contracts declined, but it was the best. year ever for sales of colour television sets in Britain
The video boom has also turned sour in the last few months, BET says that in the last 13 weeks returned VCRs effectively matched new contracts a zero net growth.
BET had been considering various solutions for its television rentals operation for about two years. It considered buying Electronic Rentals but decided it would have been too expensive. Nor was it practical to buy Granada's rental interests because they reoresented too large a portion of the company’s non-broadcasting interests.
Granada plans to take advantage of the economics of a larger rental operation. It will close the Rediffusion head office, saving about 300 jobs, and will rationalise the two chains. The object is to achieve a significant increase in sales for each showroom and thereby reduce costs. The company also intends to offer more products in the shops. This summer 100 shops
of the existing Granada chain will start selling a variety of home computers including Acorn, Sinclair and Commodore
BET Selling TV Rental Interest To Buy Out Initial
BRITISH ELECTRIC TRACTION, one of the largest diversified holding companies in the UK agreed yesterday to buy the
outstanding 59 per cent stake in its Initial towel rental and cleaning associate for £167.5m.
At the same time, BET has reached agreement to sell the television rental operations of its Rediffusion offshoot to
Granada, the rental, television, contracting, leisure and motorway services group for £120m. Granada arranged the finance for this acquisition yesterday by placing 782m new shares in the stock market at 155p. Its existing shares responded with a 13p fall to 163p. The deals. which are linked because of BET’s cash needs. are conditional upon the approval of shareholders in Granada, BET and Initial, The Office of Fair Trading must also give approval.
There was a strong indication yesterday that the independent shareholders in Initial, advised by N. M. Rothsehild, would resist BET’s offer, which is worth 520p per Initial share as too low. The shares rose 89p to 493p.
The TV rental group would have an estimnted 19 per cent share of a market which totals 11m television sets and video cassette recorders, and would start with more than 850 branches throughout the country. Granada, however is looking for substantial cost savings on the integration of the two businesses. Mr Bill Andrews, the head of Granada’s rental busness, said that about 100 branches would be closed. Rediffusion's head office at Aylesbury employing some 3O0 people, will also be closed wIthin two or three years. Both companies said that they had high staff turnovet in their branches, which wouid help to
accommodate the loss of an estimated 700 jobs.
Mr Hugh Dundas of BET, said that rationalisation in the rental market was essential and a merger or takeover had been considered.
This would have been my preference a year ago but market conditions have changed since then. The video cassette recorder scene in the last 13 weeks has been bloodstained and the speed of the downturn was faster than we anticipated,”
Mr Alex Bernstein, chairman of Granada, was confident that "we enter a virtuous circle by acquiring Rediffusion's rental business since we will be able to afford bigger and better shops". The merger " will give us a greter opportunity to parcipitate in the development of home electronics, notably computers,” he said. BET has calculated that while 72 per cent of the 8m colour television sets in the UK were being rented a decade ago, this had dropped to 43 per cent of the 18.9m sets last year.
The cash from Granada enables BET, which is retaining operations responsible for about half of Rediffusion's profits, to solve what it calls “the perennial problem of its 40.7 per cent minority holding in Initial”
Mr Nicholas Wills, BET managing director, is chairman at Initial. A report Iast year by the Monopolies Commission investigating Initial's bid for Johnson Group Cleaners said BET’s holding and board representation a!lowed it to coordinate Initial's activities with those of Advance, BET’s 80.8 per cent owned cleaning company.
Using 1981 figures. the Commission found that Advance, which is valued at about £20m, and Initial had a combined 28 per cent share of the market and 64-per cent of the cabinet towel rental sector.