View from City Road: GKN must try harder

With markets so nervous, the cold certainty of GKN's hard cash may have its attractions. But Westland's spirited defence document underlines what seemed plain from the outset - that GKN, despite a stake of in effect 47 per cent, will have to improve its offer of 290p.

The starting point is that Westland made pre-tax profits of pounds 30.5m in 1993, a year in which it delivered only four helicopters, by dint of building up valuable after- market sales. According to Westland's defence document, its pounds 1.4bn firm order book implies a rise in deliveries to an average of 10 a year from 1996 to the end of the decade. The helicopter deliveries, led by Sea King and Lynx, then followed by the EH101, will have average sales value of pounds 95m compared with pounds 25m in 1993.

This ought to be enough to put GKN's 'generous' offer of 25 times Westland's 1993 earnings into perspective. Westland, however, cannot resist painting a mouth-watering picture for potential orders and deliveries, which could boost sales by up to a further pounds 250m a year. And that is before any assembly benefits if McDonnell Douglas's Apache is selected for the pounds 2bn UK attack helicopter programme.

NatWest Securities reckons Westland could make pre-tax profits of pounds 75m to pounds 80m by the late Nineties, implying a much-needed Advance Corporation Tax benefit to GKN. Even a modest p/e ratio of 10 suggests a price of 350p.