Economy, debt jolt Rank

The Rank Organisation, Britain’s largest leisure and entertainment conglom, yesterday posted disappointing results for the year ended Oct. 31, 1992.

Buffeted by recession and plagued by debt, the company, which owns Pinewood Studios, Deluxe Labs, Rank Film Distributors and a half-share of Universal Studios Florida, spent much of last year trimming costs and selling unwanted assets. But these corrective measures were offset by falling sales and currency shifts that pushed up the cost of the company’s dollar borrowings.

Gross revenues for the year were down from $ 3.25 billion in 1991 (at today’s rate of exchange) to $ 3.23 billion. Trading profit was almost steady at $ 286 million ($ 287 million in 1991). However, the contribution from Rank Xerox, of which Rank owns 50% and which usually contributes about half of group profits, was down from $ 244.4 million to $ 211.4 million.

With interest charges static at $ 144 million, Rank’s pre-tax net income was $ 354.3 million, compared with $ 385.8 million in 1991.

This is at the low end of the range of recent forecasts made by London analysts and contrasts with the expectations at this time last year of an improvement in Rank’s performance in 1992.

Rank shares fell 9 pence, to 695 pence, on the London stock exchange when the results were announced. After a long rally from a low point of 444 pence in the middle of last year, Rank stock is now fully valued, per some analysts, and could settle back.

While most of Rank’s varied businesses — subsids ranging from holidays, hotels and theme parks to precision instruments and video duplication — are believed to be sound, there are four areas of concern.

First, the company’s debt has increased from $ 1.48 billion to $ 1.54 billion. Gearing has likewise gone up from 64% to 72%. At this time last year, Rank boss Michael Gifford pledged to reduce gearing to something nearer 50%.

He has been thwarted by currency shifts that have made the company’s substantial dollar debts increase in value. Also, provisions and property devaluations have reduced the value of Rank’s assets.

Second, the company is generating a positive cash flow only by virtue of the sale of assets. In 1992, net cash generated by operations and investments totalled $ 91 million, to which asset disposals contributed $ 232 million. In other words, there was a pre-disposal outflow of about $ 141 million.

Part of Gifford’s problem is that he must maintain a reasonably high level of capital expenditure ($ 258 million in 1992) to ensure his businesses are in good shape to benefit from the expected economic upturn. At the same time, he has retained a hefty dividend for shareholders, at a cost to the company of $ 182 million.

Third, subsids that were making losses in 1991 were still making losses last year, even if, in some cases, their performance was marginally improved. The video retailing business in the U.S., for example, reduced its losses from $ 30 million to $ 23 million. But at the start of the year it had been expected to move from loss to break even.

Finally, Xerox, over which Rank has no management control but on which it depends heavily for profits, is not expected to improve in the coming year. Its major markets in Europe and the Far East are flat at best.

As expected, Rank’s Film and TV division — the subject of much takeover speculation in recent days — increased its gross revenues from $ 908.3 million to $ 952.5 million, largely as a result of bigger volumes in video duplication. Net income increased from $ 29.9 million to $ 42.2 million, thus reversing the downward trend of the last three years.

The leisure and recreation divisions also improved on last year. Holidays and hotels, however, were badly hit, expecially by competition from overseas tour operators who offered massive discounts in the summer season.

Per analysts, there is no doubt that Rank is able to service its debts and maintain its investment program in the coming year. But debt-reduction, to which Gifford is committed, depends on the sale of further assets — a chain of hotels in on the block — without which he may have to consider cutting next year’s dividend.

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