Stripped down for a rebuild: In the third article of our series about companies that have staged recoveries, Neil Thapar reports that CSI is ready once more for the acquisition trail

FOR much of its 25-year history, Cannon Street Investments has seen more ups and downs than a big dipper in an amusement park. Along the way, the mini-conglomerate has twice come perilously close to toppling off the financial precipice, only to claw its way back in the nick of time.

The past 12 months have been particularly uncomfortable, as it struggled under massive debts and huge losses. However, a sweeping reorganisation by a new management team has improved its prospects markedly and persuaded many investors to overlook its chequered legacy for better times ahead.

Their hopes are best illustrated by CSI's share price, which has quadrupled since January to value the company at about pounds 33m. Although this is still a tenth of CSI's market worth at the height of the 1980s boom, it reflects a dramatic turnaround.

The clearest signal that it was over the worst came from Tom Long, CSI's chairman and a former director of BAT Industries, at its annual shareholders' meeting last June.

'Our portfolio of businesses is still too large and too disparate. There are thus a number of subsidiaries that do not have a long-term future as members of the group. They are under control and none of them are disasters waiting to happen, so that there is no need for fire sales,' he said.

Next month, CSI is expected to return to pre-tax profits of about pounds 1m for the half year to 30 June, against a pounds 22m loss. For the full year, Robert Gibson, an analyst at Fleming, is forecasting a turnround from a pounds 115m deficit, on sales of pounds 240m, to pre-tax profits of about pounds 4m.

With the immediate task of stabilising the group's finances largely complete, David Smith, who became CSI's chief executive last March, is likely to give shareholders a glimpse of his expansion strategy at the results.

The group was formed to build up a diversified industrial holding company by acquiring small private firms and grooming them for eventual flotation. But this strategy, devised by Bill Hislop, the long-serving former chairman, came a cropper after it made an ill-judged purchase of a secondary bank shortly before the 1973 property crash - a move that nearly pushed the group to the wall.

It took Mr Hislop a decade - during which CSI lost its stock market listing - to nurse the company back to health. In 1986, CSI returned to the public fold with a launch on the Unlisted Securities Market but was soon back to its old habits - acquiring small, entrepreneur-led growing companies at alarming speed.

In the rampant 1980s bull market, every deal by Mr Hislop seemed to push CSI's paper to higher ratings. By the time CSI's market value peaked at around pounds 400m, he was being feted like a prodigal hero by the stock market. Merchant bankers flocked to offer the company advice and money. And CSI's City image rose even higher after SG Warburg, the blue-chip merchant bank, sponsored its promotion to the main list.

Yet as the accolades piled up, CSI showed few signs of learning from past mistakes. Its breakneck, acquisition-led growth had made it increasingly complex to manage. By the time the cracks appeared, it had amassed more than 60 subsidiaries, organised into eight divisions and 18 sub- divisions - far too many for a group with a relatively modest turnover.

Another key mistake was that CSI began to move into asset-backed businesses, such as the purchase of Craigendarroch, the luxury Scottish hotel in Ballater. 'One of the things that went wrong was that CSI's old management fell in love with hotels and spent far too much on developing them,' Mr Gibson said.

Meanwhile, the group's debts had also mushroomed, partly because the 1987 stock market crash had changed investor sentiment towards acquisitive companies. With the group no longer able to use its paper, it borrowed to keep the bandwagon rolling.

The nadir was reached in December 1991, when CSI warned that it would barely break even for that year, against taxable profits of pounds 17m in 1990.

The shares, which had been falling for months, plummeted 75 per cent on the news, forcing Mr Hislop to retire. In came Robin Binks, a former Warburg director, with a simple brief to save the group. It was draining cash and carrying debts of about pounds 125m - five times its net assets - as trading conditions deteriorated.

The obvious priority for the new team was to stem the cash outflow through disposals and closures. One of the first to go was Avonside, the housebuilder, whose flotation in spring 1992 raised pounds 42m.

Businesses that could not be sold and faced a grim future were shut down. Virtually all CSI's building and construction materials activities were sold. Fewer than 20 units are left.

But the restructuring cost dear. Last year's results included pounds 57m of goodwill write-offs and a pounds 43m loss on disposals, as CSI cleared the decks for the future. Much still needs to be done. While net debt, excluding pounds 25m owed to Bank of Scotland in preference stock, has been reduced to about pounds 15m, it is too high for comfort.

The group is now concentrated in hotels and leisure - despite the sale of a hotel last week - and electronics and food distribution. However, a mixed bag of peripheral businesses remain to be sold. But CSI at least no longer has to make fire sales, as it is generating sufficient cash to keep ticking over.

Mr Binks, who stepped down from the group in March with a pounds 366,100 payoff for loss of office, has been succeeded by his friend Mr Smith, who previously led the pounds 2bn leveraged buyout of Isosceles, the Gateway supermarkets chain.

Shareholders have high expectations that Mr Smith will steer CSI on to the growth path again. Analysts believe that he is likely to use the best-performing subsidiaries as a springboard for growth.

Short term, the group's profits are expected to grow by improving margins from existing operations. But the management structures and financial controls established by Mr Smith are designed to build a much larger group.

That suggests it will probably embark on a new acquisition drive. The question is whether he can deliver a more lasting boost to shareholder value than before. An improving economic climate should help. But curiously, he has yet to signal his confidence in the company by purchasing some shares for himself.

(Photographs and graph omitted)