Premier deal props up Farnell; The Investment Column

When Farnell Electronics swallowed Premier, its far larger US rival, in a pounds 1.8bn deal in April, the critics said it was a deal too far. The scope for slip-ups was considerable, they said. And with Farnell's regular business of supplying electronic components to engineers and manufacturers chugging along nicely, they questioned its logic.

Yesterday's figures and particularly the gloomy statement from the chief executive, Howard Poulson, seemed to prove the Jeremiahs right. The first results to include the Premier deal, they showed that underlying profits at the renamed Premier Farnell were slightly below expectations at pounds 62m. The Premier business contributed pounds 34m less rationalisation costs of pounds 7.7m. The market took fright at the figures and the shares fell 20.5p to 660p.

At first glance it looks like a case of unfortunate timing. No sooner had Farnell's management got their hands on their acquisition than the markets ran into a wall. Volume growth slowed and, with a crowded market placing pressure on prices, margins weakened. In semi-conductors, unit volume demand remained relatively strong but excess capacity again hit prices and margins.

Though the warning signs were apparent in the US as early as last December, the market's deterioration was worse than management expected. It reached its worst point in May and June, which forced a warning at the June annual meeting.

That is the bad news. There is, however, a strong argument to suggest that Farnell's performance would have been far worse if it had not undertaken the Premier deal.

Premier's strength is its catalogue business, which supplies higher-margin components to customers who need smaller volumes delivered at short notice. This sector has been far less affected by the downturn.

The problem area has been Farnell Electronic Services, the group's volume distributor, which principally supplies semi-conductors to industry. Here the performance in Europe was poor, with Germany and Italy particularly weak. The volume business used to account for a third of Farnell's operating profits. Now it accounts for just 15 per cent of the enlarged group's earnings.

The priority is to develop the catalogue business. Farnell Components, the European catalogue distributor, is still growing sales and profits, albeit at a slower rate than last year. It has recently extended its opening hours to provide 24-hour availability of product.

Even so, the outlook is far from brilliant. The company is not expecting market conditions to improve for the remainder of the year, even though Mr Poulson feels they will not get any worse. Analysts are expecting full- year profits of pounds 143m which puts the shares on a forward rating of 22. High enough.