A break-up too far for Hanson: US shareholders want the disposal king to split into two but Helen Kay says a radical retrenchment is not on the agenda

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'I THINK you'll find', a senior executive of Hanson was heard to remark at a recent City lunch, 'that Hanson will be a very different animal in a year's time than what it is today.' After the hectic series of hostile takeovers that characterised the group's explosive growth in the 1980s, all the talk today is of retrenchment, refocusing and debt reduction.

Last week, Hanson announced the sale of two US offshoots, in line with its stated strategy of selling fringe interests to reduce borrowings after the acquisition of Quantum Chemical Corporation for dollars 3.2bn (pounds 2.1bn) in the summer. But the disposals are not just confirmation of the latest fashion among conglomerates for spinning off subsidiary companies; they are part of a subtle succession strategy.

With the appointment of Derek Bonham as deputy chairman of Hanson and David Clarke as chief executive of Hanson Industries, the US arm, the heirs apparent are in place. Lords Hanson and White, whose long association accounts in large part for the group's successful transatlantic split, are taking no chances in preparing it to be peerless.

'If you tidy up the portfolio and start putting operating managers to the fore, you create a business that is clearly and logically defined. Such a business can be managed without losing market value when the entrepreneurs who founded it depart,' points out James Ritchie, industry analyst at Morgan Stanley.

Nevertheless, if its US shareholders had their way, Hanson would go much further. With the tobacco market declining at about 2 per cent a year, profit growth for Imperial Tobacco will at best be pedestrian. Hanson's aggregates business and brick-making companies have also been hit by the slump in construction, and the US arm is expected to generate an increasingly large proportion of the group's profits. Last year, it accounted for 52 per cent of operating profits and forecasts suggest that, by 1995, this figure will have risen to 60 per cent.

Confirmation of this trend is expected on Thursday, when the group reports its results for the year to September 1993. Nigel Utley, industrial holdings analyst at Nomura, predicts pre-tax profits of pounds 1.04bn, with the US arm contributing as much as pounds 590m - or 56 per cent - of Hanson's total trading profits. He expects it to generate more than pounds 900m the following year.

As a result of this trend, say analysts on Wall Street, Hanson should convert itself into a US company or, better still, demerge its British interests to create two separate companies. 'The best strategy for maximising shareholder value would be to split the company into two discrete entities - Hanson UK and Hanson US - each with its own charter, board of directors and securities,' argues H Lloyd Kanev, an analyst with Smith Barney.

From the US perspective, it is a strategy that would offer several advantages. For a start, US shareholders - who at present own about a quarter of the stock - would no longer be exposed to currency risks. 'What determines the value of the stock is the pound-dollar relationship as much as earnings,' says Jack Kelly, an analyst for Goldman Sachs in New York.

But many on Wall Street believe that a US listing might also enhance Hanson's rating. 'It's pretty clear that US diversified companies have been much more active than their British counterparts in selling off companies,' says Mr Kelly. He adds that a number of small businesses, including the prestigious Jacuzzi, would be valued at double Hanson's current rating of 15 times earnings.

The break-up option is said to be favoured by some directors of Hanson Industries. However, nobody disputes that the exercise would present huge practical problems. It would also mean Hanson having to forfeit some significant tax benefits and the opportunity to arbitrage interest rates - which were much lower in the US until only a few years ago.

Hanson's complicated structure provides three tax advantages in particular. 'In the US, it has a a high proportion of sales from extractive businesses. These depreciation allowances are sufficient to depress the group's overall taxes,' notes Gavin Launder, the London-based industry analyst at Goldman Sachs.

The group also benefits from using intermediate companies in locations such as the Netherlands Antilles, through which it can blend dividend revenue from its different operations and minimise its advance corporation tax liability. Disposals made through the Netherlands Antilles companies have the additional merit of escaping capital gains tax, and without these advantages, there is no doubt that Hanson's tax bill would soar.

If the opportunities for interest rate arbitrage and tax reduction are vital, so arguably is the credit rating enjoyed by the group by virtue of its size and scale. As an A-rated company, for example, Hanson has been able to reduce interest payments on the dollars 2.5bn debt assumed with the acquisition of Quantum.

For these reasons, Hanson watchers on this side of the Atlantic are far more sceptical about the virtues of an Anglo-American demerger than their counterparts on Wall Street. They predict that Hanson will continue to rationalise its portfolio. It might, for example, consolidate its consumer product companies into one and float them off. 'It is probably not desirable to spread yourself too thin,' says Mr Utley, adding that it also makes sense to look for the safest earnings.

But no British analyst believes that the group will seriously contemplate the radical change of corporate identity involved in switching nationalities or splitting itself up. 'Break-ups generate revenue for investment banks,' says one cynic, dismissively. Another points to Lord Hanson, arguing that it would be highly unlikely he would ever approve such a move. Only one thing would drive Lord Hanson out of the country, he suggests - a Labour government.

(Photographs omitted)

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