Bottom Line: Careful wording is not enough

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The Independent Online
GREG HUTCHINGS, chief executive of Tomkins, is clearly aware of the City's sensitivity about pre-acquisition provisions. At just 7 per cent of the gross purchase price, he said, the pounds 90m set aside for rationalisation of Ranks Hovis McDougall compares favourably with recent deals by BTR, Hanson or TI Group, where provisions have been as high as half the acquisition cost.

Compared with Tomkins' own record, however, the write-offs look rather less conservative. It provided just pounds 2.2m in total against its two previous acquisitions - Philips Industries, which cost pounds 325m, and Murray Ohio, pounds 133m - and its last set of accounts showed just pounds 697,000 of reorganisation provisions still on the balance sheet.

The RHM provisions, which will cover an 18-month programme, equal the profit earned by the bread maker in its last financial year. Even more surprising is that Tomkins should give up its reputation for prudent accounting just as the Accounting Standards Board is poised to outlaw acquisition provisions.

But that simply underlines what the City already knows: rationalising RHM will be no easy task. In true Tomkins style, yesterday's statement contained little of any substance, but Mr Hutchings' upbeat mood was enough to convince some of the bears, and the shares, down 19p last week, recovered much of their lost ground.

Shareholders have to take that confidence on trust; Tomkins was giving no facts to support its contention that the acquisition is bedding down better than expected. The fact that two-thirds of the provision is earmarked for redundancies suggests there will be more to come, but Mr Hutchings is not commenting. The 7 per cent cuts in baking capacity mean that the group is operating more in line with demand, suggesting that cuts here are more or less complete; but Mr Hutchings is not commenting. Nor will he say how much cost has been saved so far.

Despite yesterday's price increase, Tomkins shares remain roughly where they were, relative to the market, after a shocked City had knocked almost 20 per cent off their value on the day of the bid, and left it at a discount to rivals like Williams and BTR, which have traditionally been less conservative in their accounts.

Mr Hutchings' formidable acquisitions record, and his ability to squeeze growth from his companies through the recession, suggest that discount is unjustified. But convincing the doubters - among them Gartmore, one of its largest shareholders - will take more than a carefully-worded statement and a few cheery words.