Blue Chip: Solve a demerger dilemma

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The Independent Online
Shareholders in Christian Salvesen will soon be confronted by a dilemma - what to do with their one free share in Aggreko, the soon- to-be demerged generator hire business.

At least on this occasion the dilemma contains grounds for optimism. A year ago, the Salvesen board rebuffed an offer from Ronnie Frost of Hays to buy the group for 400p a share.

Dwelling on what might have been is of little relevance to the future, although with the shares languishing at 265.5p some investors would question if the separation of Salvesen is too little, too late. For five years, Salvesen has been little short of a disastrous investment: the FTSE has outperformed it by 100 per cent.

On the basis of the current share price, analysts reckon Aggreko will start trading at 150p, or a market capitalisation not far short of pounds 400m, while Christian Salvesen will trade at about 130p. As things stand, Aggreko stands out from the food processing and logistics operation it is leaving behind. Margins are higher; growth in sales and profits have been higher, while there is ample scope for expansion. By contrast, the accident-prone Salvesen's margins are hard pressed, and it is as much at the mercy of the weather as of its clients. This summer, a wet June and July hammered the pea crop; while the supermarkets, one of the group's major customer bases in the UK, have long held the whip hand on prices.

So the argument would appear to be relatively straightforward. Keep the Aggreko share, and dispose of the dog. Of course, it's never as simple as that. While it would be unwise to base one's investment decisions on takeover speculation, both companies are tempting targets - neither would be too big a bite for the right candidate.

Furthermore, while Aggreko may have a persuasive track record, there must come a time when there is a change in fortune for Salvesen. The big question is when. If shareholders have to wait another three years, a building society might be a better bet.

At 150p, Aggreko will trade on a forward multiple of about 18 times 1997- 98 earnings, falling to perhaps 15 times in 1998-99, or a 10 per cent premium to the market. That would suggest a 3.45 per cent yield is achievable, roughly in line with the market.

There is little prospect of an MBO-style effect from the demerger for Aggreko - it should be simply more of the same. But if it manages that, shareholders should have little cause for complaint. Salvesen remains the unknown quantity, but even if an upturn in its fortunes is overdue, the risk of the business failing to get its act together are too distinct to warrant holding it as a long-term prospect. Stripped of Aggreko, the shares are, at best, a highly speculative buy.