Bottom Line: Thorn's musical movement is the prelude to a demerger

Click to follow
The Independent Online
JUST as the computer sector has undergone a fundamental shift from hardware to software - reflected by the contrasting fortunes of IBM and Microsoft - Thorn EMI has been moving its resources away from electrical goods manufacture into the far more lucrative area of music publishing and recording.

The disposal yesterday of its light fittings business for pounds 162m, largely in cash, is a further step in that direction.

Part of the original Thorn lighting business founded by Sir Jules Thorn half a century ago, it has been for sale for almost two years.

With its disposal, the group has not only made a symbolic break with the past but also underlined its strategy of focusing on the two core sectors of music and television rental.

It has already made considerable progress towards that aim, though Thorn's defence electronics and security business has still to be sold. Under its chairman, Sir Colin Southgate, it has pulled out of television retailing and domestic appliances as well as computer chips.

At the same time it has expanded in the music industry, notably through the bold acquisition of Virgin last year.

Although the group is still far from running smoothly - Rumbelows, the electrical chain and the UK rental businesses have been persistent backmarkers in the group - investors are pleased with its progress.

However, the group is rapidly approaching the day when it will decide on an even more radical move - demerging its music business from the rental side. This could unlock considerable value for Thorn's shareholders.

The example of ICI's demerger of Zeneca, complicated by the accompanying pounds 1.3bn rights issue, may not yet be convincing. But the successful demergers of Vodafone and Chubb from Racal, PolyGram from Philips and Courtaulds Textiles from Courtaulds are more encouraging.

In the case of Racal and Courtaulds, investors have been prepared to attach far higher values to the separate companies than they did to their parents.

Many believe that Thorn, which has a market value of pounds 3.7bn, could achieve the same by giving investors a direct opportunity to back the music business and the rental side separately.

It is not so much that the parent company is a drag on the operational businesses but that its role in reorientating would be complete. The Hanover Square office would have done itself out of a job.

There is no commercial imperative for the two businesses to remain together. Both could be highly cash-generative in their own right and they do not need to lean on each other to be successful. The chances of a demerger are likely to keep Thorn's shares at 920p, up 25pETHER write error yesterday, bubbling for some time yet.

Comments