For whom the gong tolls

INVESTORS hate interregnums. Handing over the levers of corporate control to a new incumbent can, if the process is protracted and handled badly, lead to an information void, a policy vacuum and - worst of all - a drifting share price.

It is a danger that diversified leisure group Rank risks running. Michael Gifford, the gruff, no-nonsense chief executive who has run Rank for the last dozen years bows out next month to be replaced by the former English China Clays' boss Andrew Teare.

The key question for shareholders is whether the arrival of a new broom will herald a change in strategic direction.

Rank, whose interests span film studios, bingo and Butlins holidays, is widely regarded as a mixed assortment of businesses with little obvious commercial overlap. And as the recent urge to de-merge indicates, the City regards conglomerates in whatever shape or form as rather passe and ripe for breaking up to unlock so-called hidden value.

Nobody at Rank is prepared to say if such fashionable ideas are being entertained. Mr Gifford, it would seem, does not want to map out a future of the company where he will no longer have day-to-day involvement; Mr Teare, already a Rank non-executive, does not want to say anything before he steps into Mr Gifford's shoes; and other board members are unwilling to go against the wishes of their boss - past, present or future. Hence the unfortunate hiatus.

Whether Rank should continue in its present incarnation is, of course, a moot point. Under Mr Gifford's aegis, it has become a prodigious cash generator whose balance sheet was considerably strengthened by last year's sale of 40 per cent of Rank's stake in document processor Xerox for pounds 620m.

Mistakes were made along the way, notably buying Mecca at the top of the leisure cycle, but as recent results show Rank is in a good position to exploit the improved outlook for leisure spending caused by lower interest rates and chunky building society windfalls.

Falling sales of National Lottery scratchcards should arrest the recent decline in bingo profits while proposed changes to Britain's archaic gaming laws, including looser membership rules and more slot machines - the real money-spinners in US casinos - ought to pull more punters into Rank's bingo halls, the largest in the land. Film and leisure, which takes in the Pine-wood studios, had a record year while the Hard Rock Cafe chain goes from strength to strength.

Nevertheless, some outstanding issues remain. For example, Rank failed to use the Xerox cash to buy the MGM cinema chain, splashing out pounds 300m instead to develop Oasis, a holiday theme village to rival CenterParcs. Rank still has many old, converted high-street picture houses which are suffering from falling admissions as cinema-goers decamp en masse to out- of-town multiplexes.

A year ago, this column noted that the decision to keep the remaining Xerox stake (and its knotty tax problems) was taken to avoid creating the impression that Rank was flush with cash and therefore attractive to a potential predators. Mr Gifford countered by saying the complex scheme whereby Rank legitimately avoided paying capital gains tax required that it did not sell its entire holding, which it has been steadily reducing for more than 30 years.

Whatever the real reason, Mr. Teare's arrival may pave the way for other moves to ensure Rank's continued independence.

Although he has no experience of the leisure and entertainment worlds, and his tenure at ECC corresponded with a lacklustre share price performance, Mr Teare was instrumental in spinning off building materials group Camas in 1994.

Several candidates within the Rank empire could come in for similar treatment from Mr. Teare. The video duplication arm, buried in Rank's film and television division, is the most obvious business that could be hived off. Similarly, the true worth of a leading brand like the Hard Rock Cafe, tucked away in the Rank's leisure portfolio, could be realised if sold off or floated separately.

All that may be in the future. In the meantime, analysts seem content to upgrade their forecasts and reiterate broadly positive recommendations. The verdict from US investment bank Merrill Lynch is fairly typical: "On a market average rating for 1996, Rank Organisation shares offer a sound way into the improving leisure scene, providing the broadest coverage of leisure activities of any company in the sector."

The shares closed at 490p on Friday. Investors who took our advice a year ago and bought the shares at 381p may want to take advantage of their recent strength to lock in some profits given the fuzzy strategic picture.

Rank Organisation

Share price 490p

Prospective p/e* 14

Gross yield* 4.2%

Year to 31 Dec 1994** 1995 1996* 1997*

Turnover pounds 2.20bn pounds 2.31bn pounds 2.44bn pounds 2.56bn

Pre-tax profits pounds 317m pounds 407m pounds 461m pounds 516m

Earnings p/share 21.2p 30.2p 34.1p 38.2p

Dividend p/share 13.3p 15.5p 16.5p 17.5p

* Merrill Lynch estimates **Year to 31 October