COMMENT : Deck-clearing paves the way for a mega-bid

As the battle for control of Northern Electric reaches its denouement, another takeover scrap in the same sector may be about to begin. By its own admission, yesterday's deck-clearing at Hanson paves the way for what could be the mega-bid everyone is waiting for from what used to be Britain's most acquisitive conglomerate.

A run of corny ads on television and a renewed round of presentations in the City have been providing the customary early warning signals for some months now. In the circumstances it is surprising that the shares of United Biscuits, Argyll, Yorkshire Electric and the other likely candidates were not perkier yesterday.

What Hanson is doing is pure financial engineering, of course, and an encouraging sign that the group has not lost its touch now that the narrowing gap between UK and US interest rates has shut down that lucrative little arbitrage opportunity.

There was little pretence of any industrial logic in putting together 34 disparate companies whose only common ground appears to be Hanson's indifference to their future.

In truth US Industries' raison d'tre is as a dustbin for almost £1bn of Hanson's debts, cutting the main company's gearing to a level at which the inevitable goodwill write-off attaching to the sort of deals it is contemplating would not blow a hole in its balance sheet.

Analysts believe an arbitrary 100 per cent gearing ceiling would have allowed it to spend £2.2bn but only if it could buy the same amount of assets. In reality a bid target is likely to be trading at a premium to its net worth; Hanson would have to pay an even higher price for control.

Focus now shifts to the target. Thanks to the weight of US earnings being contributed by the highly successful Quantum chemicals acquisition, Hanson reckons it will only pay a marginal tax rate of 13 per cent on any new UK earnings. That means a British target is most likely. Its other criteria would include stable and steadily growing earnings to counteract the cyclicality of its chemicals and building materials businesses.

Hanson's tax position offers the prospect of a good deal for shareholders, who will find rather hollow Derek Bonham's claim yesterday that "enhancing shareholder value has always been our most important goal". Over the past five years, Hanson's share price has risen by just 8 per cent, underperforming the rest of the market by almost a fifth. David Clarke, whose future prosperity depends on the performance of US Industries' shares, will be counting on better than that.

Trafalgar should

win the day

Barring last-minute hitches, Trafalgar House will this morning launch a new and final offer for Northern Electric, underwritten for cash at something over £11 a share. Will it be enough?

Northern's defence is ingenious and audacious even if it is also one fraught with risks. In many respects it deserves to succeed, for directors have gone as far as they dare with the process of returning surplus capital to shareholders. From a management point of view, the business left will be an emaciated and uninspiring one; for years the task will be one of cost-cutting and paying down debt. For directors, saving their jobs may have been a prime motivation but they are also engaging in a certain amount of self-sacrifice in their quest to extract maximum value for shareholders. If they succeed in fighting off Trafalgar, the company they are left with will not be the sort that most people go into business for.

Even so, Trafalgar should be able to win the day. For most shareholders, a bird in the hand is going to be worth more than two in the bush. Northern's claim that it is worth at least £14 a share depends both on a successful flotation of the National Grid and on management success in running what will be a highly leveraged rump. With other regional electricity companies trading at a substantial discount to Northern, the temptation must be to take the cash on offer from Trafalgar and reinvest it in the rest. Some institutions will accept merely on the pour encourager les autres principle. If Northern is thrown to the wolves, others will be that much keener to embark on financial reconstructions of the type used in the Northern defence. All is not lost, however. If Trafalgar's new bid proves on the mean side there is still the remote possibility of a white knight, either from North of the Border or from another conglomerate with an unrelieved advance corporation tax problem. Don't count on it though.


on pensions

Anyone listening yesterday to Richard Lapthorne, the finance director of British Aerospace, could be forgiven for thinking the end of the great British pension is nigh. He lambasted government proposals for introducing a minimum solvency requirement for pension funds. This is a key element of the bill currently going through Parliament, designed to introduce greater security in the wake of the Maxwell scandal.

According to Mr Lapthorne, this security will be bought at a high price, causing reduced benefits and risking the demise of the traditional salary- based pension scheme. Mr Lapthorne is the pensions representative of the 100 group finance directors from Britain's largest public companies so he deserves to be taken seriously.

But while many of the issues he raised are real, the strident tones he injected are pure scaremongering. It is well known that British Aerospace's pension fund would have difficulty meeting the solvency requirements. Like many other manufacturers, it has eaten heavily into its fund to pay for early retirement and redundancies as workforces have been slashed. British Aerospace will need to pay quite a bit more into its fund to bring it up to scratch under the new regulation.

But to argue that this is unreasonable, even pernicious, as Mr Lapthorne appears to do, is curious. All the minimum solvency requirement, which has been substantially watered down to meet industry concerns, is seeking to do is to ensure funds pay in now what they would have to pay in anyway over time prudently to meet their liabilities. It is not a question of whether they pay, but when. The government is offering 12 years - surely enough time even for British Aerospace to put its fund in order.

Start your day with The Independent, sign up for daily news emails
ebookA unique anthology of reporting and analysis of a crucial period of history
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Guru Careers: Pricing Analyst

£30 - 35k: Guru Careers: We are seeking a Pricing Analyst to join a leading e-...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45K YR1: SThree: At SThree, we like to be dif...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + competitive: SThree: Did you know? SThree is a mul...

Guru Careers: C# Project Team Lead

£55 - 65k (DOE): Guru Careers: A unique opportunity for a permanent C# Develop...

Day In a Page

Blundering Tony Blair quits as Middle East peace envoy – only Israel will miss him

Blundering Blair quits as Middle East peace envoy – only Israel will miss him

For Arabs – and for Britons who lost their loved ones in his shambolic war in Iraq – his appointment was an insult, says Robert Fisk
Fifa corruption arrests: All hail the Feds for riding to football's rescue

Fifa corruption arrests

All hail the Feds for riding to football's rescue, says Ian Herbert
Isis in Syria: The Kurdish enclave still resisting the tyranny of President Assad and militant fighters

The Kurdish enclave still resisting the tyranny of Assad and Isis

In Syrian Kurdish cantons along the Turkish border, the progressive aims of the 2011 uprising are being enacted despite the war. Patrick Cockburn returns to Amuda
How I survived Cambodia's Killing Fields: Acclaimed surgeon SreyRam Kuy celebrates her mother's determination to escape the US

How I survived Cambodia's Killing Fields

Acclaimed surgeon SreyRam Kuy celebrates her mother's determination to escape to the US
Stephen Mangan interview: From posh buffoon to pregnant dad, the actor has quite a range

How Stephen Mangan got his range

Posh buffoon, hapless writer, pregnant dad - Mangan is certainly a versatile actor
The ZX Spectrum has been crowd-funded back into play - with some 21st-century tweaks

The ZX Spectrum is back

The ZX Spectrum was the original - and for some players, still the best. David Crookes meets the fans who've kept the games' flames lit
Grace of Monaco film panned: even the screenwriter pours scorn on biopic starring Nicole Kidman

Even the screenwriter pours scorn on Grace of Monaco biopic

The critics had a field day after last year's premiere, but the savaging goes on
Menstrual Hygiene Day: The strange ideas people used to believe about periods

Menstrual Hygiene Day: The strange ideas people once had about periods

If one was missed, vomiting blood was seen as a viable alternative
The best work perks: From free travel cards to making dreams come true (really)

The quirks of work perks

From free travel cards to making dreams come true (really)
Is bridge the latest twee pastime to get hip?

Is bridge becoming hip?

The number of young players has trebled in the past year. Gillian Orr discovers if this old game has new tricks
Long author-lists on research papers are threatening the academic work system

The rise of 'hyperauthorship'

Now that academic papers are written by thousands (yes, thousands) of contributors, it's getting hard to tell workers from shirkers
The rise of Lego Clubs: How toys are helping children struggling with social interaction to build better relationships

The rise of Lego Clubs

How toys are helping children struggling with social interaction to build better relationships
5 best running glasses

On your marks: 5 best running glasses

Whether you’re pounding pavements, parks or hill passes, keep your eyes protected in all weathers
Joe Root: 'Ben Stokes gives everything – he’s rubbing off on us all'

'Ben Stokes gives everything – he’s rubbing off on us all'

Joe Root says the England dressing room is a happy place again – and Stokes is the catalyst
Raif Badawi: Wife pleads for fresh EU help as Saudi blogger's health worsens

Please save my husband

As the health of blogger Raif Badawi worsens in prison, his wife urges EU governments to put pressure on the Saudi Arabian royal family to allow her husband to join his family in Canada