COMMENT : Deck-clearing paves the way for a mega-bid
Thursday 23 February 1995
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.
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.
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.
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