German purchase not without risk for Waterford Wedgwood

WATERFORD Wedgwood, for so long stifled by debt, is entering Christmas week in a joyous mood. It now has some of the hallmarks of the old Waterford Crystal spirit which it used woo other high quality product groups to join its club.

The takeover of the fine china group Wedgwood was a shining example. Indeed, it was Wedgwood that provided the crystal side with the financial strength to survive those arduous years.

Now with the proposed take over of a 9.1 per cent interest in Rosenthal, the German manufacturer of porcelain products, and the potential to increase this to 24 per cent and beyond it is entering a new era. It is an exciting move and has all the appearances of being a snug fit. The move, however, is not without risks. Even on this week of good cheer, the following question should still be posed as a major loss maker, will Rosenthal prove to be an albatross around Waterford Wedgwood's neck?

The potential problems are three fold. First how will the losses be stemmed? Second how will Waterford Wedgwood, as a minority shareholder, influence the German supervisory board? And third how will the so called "strategic alliance" help the sale of Waterford crystal ware into the German market, a market which has, up to now, shunned the products?

Rosenthal has been recording pretty heavy losses. In 1995 it lost DM17.5 million (£7.6 million) on sales of DM330 million (£115.3 million). Rosenthal is about one third the size of Waterford Wedgwood in terms of sales, and its losses loom large when compared with Waterford Wedgwood's profits of £28 million.

Bluntly, Rosenthal is losing money because its production and labour costs are far too high. The labour costs are estimated at DM50,000 (£19,400). This compares with DM27,000 at Wedgwood, so the German labour costs are double British costs, a situation which is unsustainable.

Rosenthal, in common with other German industries, is already on a labour shedding programme. Around 300 redundancies took place this year. This is helping profitability. Losses of DM10.7 million are projected by German analysts for 1996. This implies a break even in the second half.

Waterford Wedgwood has had plenty of experience in cutting labour costs first at Waterford Crystal and later at Wedgwood. But how can it influence the 12 member supervisory board?

This board consists of six worker representatives and six shareholder representatives. Waterford Wedgwood's representation might be two, or three, taking an optimistic view. In that scenario, Waterford Wedgwood would wield little influence. However, under German legislation, the ratio of shareholders to workers, on boards, changes from one to one to two to one, when employment falls below 2,000.

Rosenthal now employs 2,200 and as the shedding continues, it won't be long before it goes below 2,000. Then Waterford Wedgwood would gain a more influential representation, particularly if it increases its stake beyond 24 per cent.

So far so good. But what about the third potential problem how do you interest a disinterested market in Waterford Crystal? The straight answer is that you don't. The focus, instead, will be on Wedgwood products which are already sold in Germany.

The other side of the coin is the potential for the Rosenthal porcelain brands. With Waterford Wedgwood's strong distribution network (the US for crystal, and Japan for Wedgwood), the potential for increasing sales is substantial.

Clearly Waterford Wedgwood, whose initial 9.1 per cent stake has to be approved by Rosenthal shareholders next month, is facing a delicate balancing act over the implementation of a Waterford Wedgwood type redundancy package at Rosenthal, and on gaining greater control over Rosenthal's board, over a two to three year period.

But if it works, Waterford Wedgwood shareholders can expect to receive bigger presents in the years ahead.