Rank report
JOHN BULL
An intelligent appraisal of the prospects for Rank Organisation is now going the rounds. It comes from brokers De Zoete & Gorton, who argue that the present high rating of Rank Organisation is fully justified. The meat of their circular is a detailed ex- amination of Rank's major asset—its holding in Rank Xerox. Indeed without Rank Xerox, Rank today would be a small dull group with a chain of cinemas as its main activity. With Rank Xerox, it is one of the largest British companies with growth prospects second to none.
Rank Xerox provides over 80 per cent of Rank's earnings. Even if profits from the other activities were to double over the next five years, shareholders would hardly notice. Rank Xerox is the key to Rank. It was formed by the Xerox Corporation of the United States and the Rank Organisation to market the products of Xerox Corporation in the world outside the us and Canada. By means of a complicated capital structure the company is a subsidiary of both Xerox and Rank. Profits are divided 50-50 up to a certain point and one third to Rank and two thirds to Xerox thereafter.
The original agreement between the two companies was made at a time when xerography (copying) was a highly speculative project. In retrospect, the terms which Rank obtained look extremely generous; indeed, in many ways Rank Xerox has been a more attractive operation than Xerox itself. Both have grown rapidly, but Xerox has got near to market saturation in North America and its sales growth there has slowed down so that it is now about 20 per cent per annum compared with 30 to 35 per cent per annum in the rest of the world. Rank Xerox is also more profitable than its founder. Rank Xerox profit margins are run- ning at about 40 per cent before tax, whereas Xerox margins are down to 23 per cent before tax. The difference in the profitability of the two companies arises because Xerox carries all the research and development on new products; because Rank Xerox has delayed introducing new models until Xerox has overcome the teething troubles; and because Rank Xerox's labour costs are lower than those of Xerox. This comparison goes some way to explaining why American investors have been such avid buyers of Rank Organisation. It has looked the smart way of getting into Xerox.
However, the agreement between the two partners has recently been altered. It now gives Xerox ultimate control of Rank Xerox and in return secures continuing Rank Xerox rights in the Xerox Corporation's eastern hemisphere operations. Rank Xerox's posi- tion is unchanged on existing xerographic products; on future developments in this field it has limited rights and on more diversified products it has no special rights and certain obligations. For non-Xerox pro- ducts, Xerox is not bound to give Rank Xerox any interest, but Rank Xerox must ac- cept any eastern hemisphere business which Xerox acquires and wishes to transfer to it. In exchange for these new terms, Rank has been issued with f64 million worth of Xerox shares.
What is the outlook now? De Zoete & Gorton have done a lot of detailed work on sales prospects for various lines and come to the conclusion that Rank ought to be valued somewhat more highly than it is now. They say that the Rank share price appears in- adequately to discount the long-term growth and to be in a position of short-term strength.
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Qis for Queer street
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