BTR attempts to counter adverse City sentiment

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The Independent Online
BTR, the industrial conglomerate headed by Alan Jackson, believes it has become the victim of a damaging whispering campaign in the City that is undermining investment confidence in its accounts and adversely affecting its share price.

Adverse sentiment in the stock, which has substantially underperformed the market in the past four months, is being led largely by Terry Smith, the analyst who caused a furore with his book Accounting for Growth.

BTR has been trying to counter Mr Smith's view but believes it is being unfairly required to 'box in the dark' since he has not committed any of his criticisms to paper.

This weekend, Mr Smith gave the Independent on Sunday his first detailed explanation for his doubts on BTR, long one of the darlings of the stock market.

Many companies criticised in Mr Smith's book have subsequently performed poorly, and his views are being closely studied by professional investors.

His starting point is BTR's 1991 takeover of Hawker Siddeley Group for pounds 1.5bn, of which pounds 807m was paid in cash.

That transaction is believed to have been the main reason for acquisition provisions that totalled pounds 305m last year alone, compared with group pre-tax profits of pounds 1.08bn.

'I measure the size of the write-downs,' Mr Smith explained. 'The chances are that the bigger they are, the lower the quality of the profits. BTR's are bigger than any other I have looked at, in relation to the acquisition cost and the target company's net asset value. That means it is very, very difficult to tell whether it was a good deal or not.'

Investors and analysts at the time expressed surprise that BTR felt it needed to increase its original offer, which many had already considered to be generous.

Second, Smith pointed out that between 1987 and 1992, BTR's sales and pre-tax profits doubled while overdrafts, bank loans and trade accounts rose by more than four times.

'It's better to run long-term debt against long-term assets, just like when an individual buys a house,' Mr Smith declared.

'It's particularly risky in the case of conglomerates, because they are often taking over companies on a hostile basis. Those companies may not be as good as they thought they were, when they get in them.'

Mr Smith's downbeat analysis has been a factor in the steady decline in BTR shares since the beginning of August.

In the past four months, BTR has dropped from a 1993 peak of 410p to 337p, its lowest since March, before recovering to 350p in a jagged series of rises and falls that were in sharp contrast to the behaviour of the market as a whole.

During that time, BTR has underperformed the FT All- Share index by 13.8 per cent.

Until disappointment with Hanson's recent dividend announcement affected sentiment, Hanson and BTR shares had been moving in diametrically opposite directions, as our chart shows.

Other analysts dispute the validity of much of Mr Smith's criticism, pointing out in particular that the increase in BTR's short-term debts has been nearly matched by tripled cash holdings at a time of falling interest rates. A BTR spokesman said: 'It is not our usual policy to comment on any individual analyst's reported views, particularly if the analyst has not published them.'

Nevertheless, rival analysts have been trimming their 1993 profit forecasts for BTR by up to pounds 50m to around pounds 1.32bn.

Mark Loveday, senior partner-elect of Cazenove, BTR's brokers, acknowledged: 'Various analysts have been changing their estimates a little bit.'

(Photograph omitted)