Trouble for Racal as Ernest the conjuror loses his magic touch

I never really thought that I might write Sir Ernest Harrison and the late, lamented comedian Benny Hill into the same sentence. But it strikes me that a suitable professional epitaph for the chairman of Racal Electronics might read: “Ernie – he drove the sharpest share-float in the West.”

But for all his success in bringing Racal to the stock market and subsequently floating off Vodafone and Chubb, Sir Ernest has had a tough time of it.

At the start of last week, Racal issued a profits warning that saw its share price tumble some 50p to 225p. This was just the latest drama in the long-time rollercoaster fortunes of a group that can be described, at various times, of either delivering or withholding shareholder value.

What is slightly curious about last week’s nose dive in shareholder value (though it should be added that the shares had recovered to around 248p by the start of this week) is the manner with which Racal appeared to make a rod for its own back. Out came the announcement on the Monday that Racal’s efforts in radio systems were not going to match budgets this year and that, as a consequence, profits in the current year are likely to be about one-third lower than last year’s performance.

This curt comment came in the wake of an altogether warmer and sunnier outlook predicted in August, when Racal told shareholders that the company was on schedule to raise pre-tax profits, even after a 20m restructuring charge.

What a difference a quarter can make. As chief executive David Elsbury candidly put it, Racal is in the hands of its customers. You only need a major contract to fail to come through in this business and you’re stuffed.

But that is true of many an industry and the City was well choked off by Racal’s change of heart. There were those who felt that they had been sold a classic piece of Sir Ernest’s prestidigitation: “Now you see it now you don’t.” The trouble is that the City likes magicians who make earnings appear rather than disappear.

But it was the style of the disclosure of the profits warning that really hurt. Analysts and fund managers are used to having this sort of thing broken to them gently. It’s like the parent’s admonishment of the child – I don’t mind what you do wrong, so long as you tell me.

It isn’t, of course, true. Parents and shareholders mind very much how children and companies behave – what they mean is that they want to remain fully informed so that they can stay ahead of the game. Racal’s blunt Monday announcement, rather than a series of softening briefings behind closed doors, amounts to: “Dad, I’m very sorry, but I’ve run up serious debts at school and I’ve sold your Mercedes to settle them.”

But the serious difference between parents and the City is that the former are the sole owners of the child – the latter are only part-owners of the company. It is, perhaps, no bad thing that companies the size of Racal decide that all shareholders – including the much-vaunted private investor – should receive this kind of information at the same time, rather than that some City slickers should be favoured ahead of the game.

This is radical stuff, I know, but it may even become fashionable for companies to start treating all their shareholders in the same way. The Stock Exchange has, after all, been asking them to do so for some time. But, like teenagers, companies are unlikely to behave as their parents wish them to until it becomes fashionable to do so.

Racal has long enjoyed a reputation for behaving in a manner that is ahead of the trend. It should not be overlooked that Sir Ernest, by issuing new paper in Vodafone and subsequently Chubb, was well ahead of the fashion for demerger that has latterly been adopted by ICI, Hanson and Thorn EMI, to name but three. Today’s cavaliers are tomorrow’s establishment.

The question now is what Sir Ernest will do next. One delightful piece of whimsy is that he might honour a threat he made six years ago and take the group private. Depending on the developing nature of a future Labour government, that may be a manoeuvre that becomes fashionable.

But Sir Ernest is 70, and it may be something to do in one’s early 60s. Even his seemingly boundless energy must at some stage be redirected towards his gardening and there does not appear to be a ready candidate to inherit his radicalism.

A takeover bid must remain a possibility. Sir Ernest and his colleagues fended off Williams Holdings at the start of the decade. But they may not have the stomach for another fight – nor, more importantly, may the disenchanted institutions.

But there might be another possibility. Sir Ernest, variously described as Midas, Houdini and some less flattering close-up conjurors, may still have something up his sleeve. Watch Racal’s telecommunications interests. If Sir Ernest were to invite in a foreign investor anxious to break into British telecoms – say an American – then he might give the City something to applaud again.