City: Dear ICI, don't delay - demerge now

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The Independent Online
SIR DENYS HENDERSON, chairman of ICI, must by now be fed up to the back teeth with all the merchant bankers, analysts, lawyers and accountants bombarding him with highly paid advice on the chemical giant's radical demerger plans. ICI is due to announce its full-year figures at the end of February and must by then decide whether to push ahead, as originally scheduled, with an early demerger splitting the group into two separately quoted companies, or delay into the indefinite future. At a loss for a non- technical overview, it would be understandable if Sir Denys were to turn to a City confidant for advice. This is what such an impartial adviser might say:

'In operational terms, the two parts of the group are already separate with their own independent legal status and chief executive officers. ICI committed itself to the concept of demerger some time ago and the 'hive down', as you chose to call the process of separation, is now complete with the creation of two organisations - Zeneca, the pharmaceuticals and agri-chemicals interests, and the rest of the ICI businesses. You may or may not have made the right decision. That's not for me to say. The only remaining question is the big one: whether to push ahead now with the real thing - full- scale demerger into two separately quoted companies - or delay until the economic landscape looks more favourable.

'The case against early demerger is best put by Smith New Court, which argues that the right thing is to wait for more auspicious times. It goes roughly like this. If you demerge now at the bottom of the economic cycle, with the bulk chemical interests barely profitable, you will have to accompany it with an equity issue - either a rights issue or maybe an international offer - of something in the order of pounds 1bn. The bulk chemicals interests will need to be floated free or nearly free of debt if the company is to be viable. Quite apart from its present lack of profitability, it faces huge environmental spending into the indefinite future. That would mean piling all the group's existing debt on to Zeneca, which as a consequence will need refinancing. I would think that to be put on the same financial footing as other leading pharmaceuticals companies, it would need to raise a minimum of pounds 1bn, and possibly a lot more.

'It may well be, of course, that ICI needs a rights issue anyway. You'll have to dig deep into reserves to pay a maintained dividend for last year. While the outlook for 1993 is certainly one of improvement, I simply don't believe it's going to be as good as the Government likes to make out - certainly not good enough to relieve you of the growing debt and cash problem you have at the moment. There's also the added difficulty of an ever-lengthening queue of companies wanting to raise money on the stock market as the economy pulls out of recession. BP, Trafalgar House, Lasmo, Allied-Lyons, virtually everyone in the bombed- out construction sector - you name it, they all want to raise money on the stock market. If you don't watch it, you'll be crowded out.

'In Smith New Court's mind, you might be able to get away without tapping shareholders at all if you delay demerger until economic recovery is fully under way. By then, the bulk chemicals businesses will be strongly profitable, once more enabling you to float them with an element of the group's debt. This will in any case be reduced by enhanced cash flows. Indeed, the stockbroking firm actually goes so far as to suggest that if you floated now, the sum of the parts would be worth rather less than the whole - about pounds 9.50 against the current stock market price of pounds 11.05.

'For every bear there's a bull. James Capel and Nikko are much more optimistic. They reckon that the combined value of the two companies would be more like pounds 12, and fortunately it is their view that seems to be prevailing. As you no doubt recall, Smith New Court acted for Hanson in its abortive assault on ICI and it may be they still have an axe to grind. Raising pounds 1bn is hardly such a tall order for a company as large as ICI. You haven't touched your shareholders for new money since 1976, and anyway, if you don't want to do it that way, there would be plenty of support for an American-style international offer of new shares in Zeneca.

'The timing is never perfect for these things; there's always something muddying the waters. The danger is that if you delay now, having built up such a head of steam in the company and the City for separation, you will lose momentum and it may never happen. Nobody ever reached the summit of Everest by being as cautious as Smith New Court suggests you should.

'There's another factor you have to take into account - the personal one. If you don't proceed now, having set so much store by the proposal, it might be seen in the City as a loss of face. On the other hand, if you do proceed and this runs counter to the prevailing mood, it might be viewed as ego getting the better of judgement. There is after all already a substantial vested interest among top executives in seeing this go through. On balance, however, I believe the greater risk lies with the former possibility. Furthermore, if you delay, even for a couple of years, a lot of the rationale for the demerger goes out of the door. The whole idea is to position the two parts of the group more adequately for the changes and challenges of the 1990s. So if I were you, I'd forget Smith New Court and do it now.'

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