Waterford not likely to make Doulton bid

Looking at the problems of the china manufacturer, Royal Doulton, and the slump in its share price, it might be tempting for Waterford Wedgwood to take an opportunistic view and make a bid. Royal Doulton is now valued at a mere £66 million sterling (€103 million), a far cry from the £124 million (€194 million) last June.

There could be substantial synergies with Waterford Wedgwood's British ceramics company, Wedgwood. Together they could be a winning team on the world stage.

That scenario looks attractive on paper. But to get it to work effectively it would be costly, and the eventual outcome would be uncertain. Unlike Waterford Wedgwood's other take-overs, such as Rosenthal, the German porcelain manufacturer, Royal Doulton is not in the process of recovery; it still has major problems ahead. Last week it startled the market with the statement that it had lost £10$12 million sterling in sales, representing about 5 per cent of annual turnover, as the introduction of new software systems delayed deliveries by up to 10 weeks. That promptly cut the share price by 23.5p to 79.5p.

Ironically, the new computer system was installed to guard against the Y2K bug. It appears the glitch arose because of problems integrating the new equipment with the group's existing computers. The result? The china manufacturer was unable to supply distributors when they ran out of stock. Royal Doulton had to spend £1 million to solve the problems. And the statement that "weekly deliveries have now returned to the levels experienced prior to the introduction of the new systems, and order backlogs are expected to return to previous levels by the year-end" did not renew confidence.

The computer problems, and the subsequent cut in sales, came as it was already struggling to revitalise its business. To increase its customer base, it focused on higher margin sales outlets and the development of new products. In a debt reduction exercise, it cut stocks but also raised £31 million in a share issue, ironically half of what it is worth today.

It is facing tougher competition, from china producers such as Wedgwood. Royal Doulton has also been hit by its decision to discontinue shipments to discount retailers. Now losses for the year are expected to exceed analysts forecasts of $16 million. And although it announced the laying off of 1,200 employees, a fifth of its workforce, last December, further rationalisation can be expected. All things considered, Royal Doulton is a sticky commodity and would be best avoided.

Indeed, reliable sources say Waterford Wedgwood does not have Royal Doulton on its present hit list, which is reassuring as last week the British china manufacturer admitted it will take three to four years for prospects to improve - obviously a take-over would be sharply ?????????earnings dilutive. Its problems can only help Wedgwood which is continuing to feel the impact of strong sterling, and the lacklustre UK market. Wedgwood is continuing to be a drag on the group's performance, and its problems need to be sorted out. The last results, for the six months to June 30th, 1999, made clear that the crystal side is making all the running.

But the second six months will see the first contribution from All-Clad, the US cookware company, which was acquired. The aim is to push this company's products into Europe with the use of Waterford Wedgwood's distribution network. Much of its focus is likely to be in this direction and the expansion of its designer labels which are proving so successful.

Waterford Wedgwood, aware of the potential Y2K problems, observed that even the best run operations will face Year 2000 compliance failures. However, its systems were deemed 98 per cent compliant in June. Contrast that with Royal Doulton's rundown to Year 2000. It was bad enough having the systems failure but the admission by the group to the Financial Times that "there was inadequate internal planning on this - it wasn't just a software problem", makes it avoidable as a take-over candidate, at this juncture.