Racal Electronics Plc has pre-empted the possibility of Millicom’s 15% of its Racal Millicom Ltd cellular radio mobile telephone business passing to an unwanted partner by agreeing to buy the holding, plus the 5% held by Hambros Advanced Technology, for new Racal shares with an indicated value of UKP90.1m; Racal will also pay Millicom a total of up to $30m in cash, $15m payable on completion, the balance in January 1988, in return for cancellation of its 10% pre-tax royalty from the business. Racal Millicom is the parent for the business that trades as Racal Vodafone, and as a result of the deal, Racal will have 100% of the operation, and sees the development as facilitating its entry – probably with new partners – into the continental European market. Racal has its eye on becoming a major player in any eventual pan-European cellular radio system. Racal can say that it has come out well under the terms of the agreement, which values Vodafone at about UKP450m, because if the business had been valued on a par with similar operations in the US, it would have had to pay another UKP48m or so for the 20% minority, further diluting the equity of existing holders. As it is, Millicom will end up with nearly 7.5% of Racal Electronics’ equity, and Hambros over 2%. Each has agreed not to sell more than 20% of its Racal shares for at least a year; the new shares only qualify for dividends from April 1. The valuation of Vodafone at UKP450m (some accounts have put the figure at UKP550m, but that is because they have included the sum payable to Millicom to buy out its royalty agreement) compares with a market capitalisation for the whole Racal group of only UKP1,040m, which suggests that at the current 182 pence or so, the company is substantially undervalued. Racal claims 63,000 of the 120,000 or so UK cellular telephone subscribers, well ahead of its target of 60,000 by March 1987 – and it is still adding subscribers at 1,000 a week, so by the end of March it should be over 75,000. The company is now forecasting cellular operating profits of UKP10m for the year to March, and has upgraded its fiscal 1988 and 1989 forecasts, going for UKP34m next year and UKP57m the year after. The forecasts are upgraded from previous targets of UKP5m, UKP20m and UKP37m for this and the next two years.
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