A dividend cut completes ICI's transformation

Genome patents; Another DTI gaffe
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The Independent Online

Analysts and investors were all being terribly statesman-like about ICI's much trailed dividend cut yesterday. It was only to be expected, many were saying, and in any case, by axing the payout ICI succeeds in putting itself on a par with European and American peers, which generally have much higher levels of dividend cover. Better that ICI invests the money in growth opportunities elsewhere than continues giving it to us, some generously added.

Analysts and investors were all being terribly statesman-like about ICI's much trailed dividend cut yesterday. It was only to be expected, many were saying, and in any case, by axing the payout ICI succeeds in putting itself on a par with European and American peers, which generally have much higher levels of dividend cover. Better that ICI invests the money in growth opportunities elsewhere than continues giving it to us, some generously added.

All of which demonstrates that if there is one thing ICI has been good at in recent times, it is in managing expectations. Unfortunately, there's not much else to boast about. That yet more bad news can be greeted in such a sanguine fashion tells its own story about the air of depressed resignation that hangs over this one time bellwether stock.

It all looked so different just three years ago. Under Charles Miller Smith, only recently hired from Unilever as chief executive, ICI was about to embark on an ambitious transformation, abandoning its dependence on highly cyclical bulk chemicals and focusing instead on more stable, higher quality speciality chemicals. To bring about this transmutation, Mr Miller Smith bought his old specialities business from Unilever for nearly £5bn and promised that this would be paid for by selling off the bulk chemical interests. The City liked the strategy and the shares soared to an all-time peak of more than £12.

Then disaster. As it subsequently transpired, Mr Miller Smith had bought at the top of the market. Worse, the business downturn from the summer of 1998 meant there were few buyers for the bulk chemical interests. The subsequent shift in investment interest from old to new economy further depressed the value of these assets, and even today, with the sales largely complete, ICI has failed to realise anything like the amount necessary to justify the strategy. At nearly £3bn, debt remains high, and at just 425p, the share price remains down in the dumps.

Some analysts believe the strategy is finally beginning to come good. To some extent, it can be seen in yesterday's third-quarter figures - stronger top line growth in sales, higher margins, more stability. But it's been a long haul and the shares are still a pale shadow of their former selves. It is impossible to say whether ICI might have done better by sticking to its knitting, and instead of bulking up in speciality chemicals, bulked up in bulks, but given the fire-sale prices available, it might have done.

One thing that was certainly not in the script when the Unilever assets were bought was a halving in the dividend with perhaps further to fall thereafter. The City would not have lent its support so wholeheartedly had it believed such an outcome was lying in wait three years down the line.

Corporate transformations are never easy to achieve. Many more fail than succeed and perhaps the lesson of this particular episode is that it rarely pays to quit one business for the single purpose of buying into another. A rare example of success is Marconi, which has brilliantly exited defence electronics to specialise in the New Economy growth market of telecommunications equipment. What Marconi has shown is that the conjuring trick needs luck as well as judgement and, up until now at least, luck seems to have deserted Mr Miller Smith. Let's hope that the dividend cut marks a change of wind.

Genome patents

It's a cliche, but a true one none the less. Britain is very bad at exploiting its own inventions and discoveries. The examples of made in Britain technology, given away and successfully exploited elsewhere, are too numerous to list. Right now there's another in the making, and it's a biggie too. Britain has been at the forefront of the worldwide project to map the human genome, and no more so than the Sanger Centre near Cambridge, founded and funded by the Wellcome Trust and the Medical Research Council. In the spirit of scientific endeavour, the Sanger Centre makes all its research publicly available, free of charge, and has never attempted to patent any of it.

This is all very well and worthy, following as it does the principle that all knowledge should be public, but it may also be short sighted. In the US, private sector companies have been active in attempting to patent parts of the genome, and jolly contentious it has been too. Many of these patents won't stand up to legal challenge, but some that pass the test of practical use will. The Sanger Centre's stance is admirable in some respects, but when others are gaining commercially from such work it may not be appropriate. It doesn't benefit Britain, and it may not benefit the long-term interests of medicine either.

There is plenty of evidence to suggest that pharmaceutical companies will not develop gene sequencing for therapeutic purposes that is unpatented, this for the simple reason that such treatments would be difficult to defend from generic competition. Perversely therefore, publishing the human genome may halt therapeutic development rather than enhance it. So on two levels, the Sanger Centre may be wrong. All that a patent does is establish rights of ownership, it does not have to mean that the technology is kept secret. The Wellcome Trust should rethink its stance on the human genome, or it will be accused by future generations of negligently giving away its property rights.

Another DTI gaffe

My, does the Department of Trade and Industry have a habit of putting its foot in it. Only days after announcing a spanking new policy to depoliticise mergers policy, eventually to be backed by primary legislation, ministers have moved again to overturn the advice of their own, independent competition authorities.

Not that it would have been easy to spot this from the DTI press release yesterday announcing that Kim Howells, the Competition and Consumer Affairs Minister, is blocking a little noticed merger involving the drums and reels businesses of Sylvan International and Locker Group.

According to the press release, Mr Howells has accepted the conclusions of the Competition Commission that the merger would have an adverse effect on competition in the markets for timber, plywood and cardboard drums (well someone's got to make them, haven't they). Nothing wrong with that, it would seem. Under its new policy, the Government is committed to going along with whatever the Competition Commission or the Office of Fair Trading recommend.

Only those conclusions were actually the minority position of the chairman of the committee of inquiry, Denise Kingsmill. The majority view was that the adverse effect could be dealt with by some behavioural undertakings. Under the spirit of the new policy, that is the position Mr Howells should have gone along with. As it happens, the Kingsmill view was backed by the director-general of Fair Trading, John Vickers, which sort of vindicates Mr Howells' stance.

But the decision also makes a mockery of the new policy and highlights an obvious flaw in its approach; when even the "experts" cannot agree what should be done, it is not clear they ought be deciding it.

* outlook@independent.co.uk

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