Hands up if you've had enough of the City

The old economy's forgotten heroes are going private or buying back their shares

Engineers, builders and textile firms have always had the "unloved sector" excuse to fall back on when their share prices are looking bad. But if things carry on as they are, they might not even have that.

Engineers, builders and textile firms have always had the "unloved sector" excuse to fall back on when their share prices are looking bad. But if things carry on as they are, they might not even have that.

This year is set to smash all the records for both share buybacks and company buy-outs, and the great majority have taken place at the grimmer end of the old economy. If the trend continues, say analysts at HSBC, some of the UK's well-known traditional sectors could wither away to nothing, while others will get rolled up into much broader industry groupings.

Over the past 18 months, market conditions have made share buy-backs increasingly attractive to old-economy companies which feel that their steady, profitable businesses are unfairly treated by investors. In addition, as the market indices have grown in importance, the old economy's relatively small influence has produced another reason for investors to look the other way.

In a growing number of cases, the market's recent obsession with hi-tech companies promising big things has encouraged some old players to consider going the whole hog by taking their company private.

HSBC's Steve Russell says: "The current love affair with top-line growth rather than total return has left many stable, cash-generative companies ripe for buy-outs."

The trend is well under way. Combined buy-outs and share buy-backs have returned £9.5bn to shareholders this year, and projections (see the graph above) suggest this will reach over £20bn by the end of 2000. The companies find their share prices languishing and a tax and interest rate environment that makes debt look attractive.

The list of companies taking themselves private this year includes a number of big names. Arjo Wiggins, MEPC, Hogg Robinson and Allied Textiles have already completed, and McKechnie, Coats Viyella, MEPC and Hyder are waiting eagerly in the wings.

The effect, says Mr Russell, will be that certain sectors will see their members slipping into either private or overseas hands "to the point where the concept of the sector itself becomes fairly redundant".

Diversified industrials has already more or less disappeared, and next in the queue of dwindling sectors are paper and packaging, construction, textiles, engineers and utilities. The growing view is that the few surviving members of these groupings will be combined into new general manufacturing and general con- sumer goods sectors.

Until this year, the buy-out activities had been centred on smaller and mid-cap companies. A feature of the buy-outs in 2000 is that not only is the total number setting a new record, but the size of the deals has increased markedly. In 1999 the average size of a buyout was £70m-£80m, but in 2000 the average size has soared to over £400m, with four deals over £1bn. Much of the impetus for this has come from the US, which has a strong background expertise in financing buy-out activities. The private equity funds KKR and Hicks Muse, for example, currently have capacity for $50bn (£33bn) of buy-outs across Europe.

According to some analysts, a situation has been reached in which it will only really take one big buy-out per sector to send the companies below into a spin. In the water sector, this might have been Kelda but, according to one analyst, "there is still plenty of scope for the whole lot to end up as mutuals". Among the metal-bashers, TI Group, valued at about £1.8bn, is frequently seen as a likely candidate for taking itself private.

The HSBC analysts believe that other sectors may find themselves following suit. The tobacco stocks may still feel like important parts of the market scene, but if they take much more of a battering and one decides it's had enough, the remaining two could end up rated along with consumer products.

Similarly, food production is a sector under siege. As one analyst puts it: "The great beauty of foods used to be its depth. Now you're just left with a couple at the top and a handful of minnows."

If the HSBC prediction comes true, the FT-SE authorities are going to have a considerable headache working out who should go where. For the groups that end up members of a decent sector, there remains the tricky problem of coming up with new excuses to reel off to disgruntled shareholders.