Thorn review expected to lead to break-up

Thorn has launched a strategic review that is likely to lead to a break-up of the troubled rental group. Andrew Yates finds that a succession of disasters has forced Thorn's management to consider desperate measures.

Thorn, which runs the Radio Rentals chain, signalled a huge shake-up of the group yesterday as it embarked on a review designed to reverse its flagging share price. A series of large disposals and a pay-out to shareholders could be on the cards.

Mike Metcalf, Thorn's chief executive, said: "We will have to review all the options. In the current circumstances we will look at disposals. If Thorn can make substantial disposals then it would be appropriate to return value to shareholders."

Analysts believe that Thorn will be forced to sell off or demerge the US rental business, which has been battered by intense competition and has lost market share. Thorn is also likely to have to restructure its UK operations and sell off some of its underperforming European businesses.

Mr Metcalf said: "There is a significant gap between our market value and the underlying value of the business. We have to close that gap."

While the review was welcomed by analysts, some were sceptical that Thorn could create much more value for shareholders. One analyst said: "Radio Rentals will continue to decline and its US businesses have been hit hard. It should be able to stem the fall in profits but it will struggle to produce strong growth which will be reflected in the values it can get for its businesses."

Thorn was controversially demerged from EMI, the music giant, in August 1996. Since then its shares have fallen from more than 400p to just 153.5p, despite recovering 3p on yesterday's announcement.

Thorn's move came on the back of disappointing results for the six months to September. The group reported a 28 per cent fall in pre-tax profits to pounds 57.1m.

The Radio Rentals business has been hit by the introduction of insurance premium tax which has led to an average 6 per cent rise in the cost of rentals.

Building society windfalls have also led to a rise in TV and video sales rather than rentals. Thorn admitted yesterday that revenues from Radio Rentals would continue to decline by around 6 to 7 per cent a year, despite the rise in the number of white goods, such as washing machines, that are rented.

Thorn hopes to counteract the fall by the rapid expansion of its Crazy George's electrical goods and furniture rental chain.

Thorn's shares have also been dogged by litigation fears in the US over the terms of its rental contracts. Despite already having a pounds 75m ruling against the group, Mr Metcalf sought to play down the impact of the litigation. "These rulings only affect 60 of our 1,400 stores in the US and if we had to close those shops it would not torpedo our US operations."

Thorn said it planned to complete its review by next May, although it hoped to report some progress as soon as possible.