Get ready to do the splits

How will the proposed demergers of Hanson and British Gas affect small shareholders?
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Hard-fought City takeover battles, such as the recent dogfight between Granada and Forte, give shareholders of the target company a choice of accepting or rejecting a bid. But shareholders also have to give approval when the opposite happens in demergers, where a company breaks itself into smaller separate companies. The 1.8 million British Gas shareholders will be asked to vote on the demerger plan scheduled for next year. This would split the existing company into two separate parts - British Gas Energy and TransCo. And before that, 227,000 small shareholders in Hanson will have to decide on that group's plan to split into four companies.

Q : Why do companies want to demerge?

A: There can be a variety of reasons. One idea is that demerging will make the stock market see hidden value in the new companies, according to Philip Ryland of Investors Chronicle. The value of the separate companies may be higher in total than the share price of the single company. In addition, separate companies may be more tightly focused.

Q: What are the plans for Hanson?

A: The proposals are at an early stage, but the plan is to create two new companies on 30 September: one covering Hanson's chemical interests; the other covering tobacco. A few months later, a demerger covering energy interests will take place. So there will be three new companies plus the remaining Hanson company covering building materials and equipment.

Q: What do investors have to do?

A: An extraordinary general meeting will take place a month or so before each of the demerger dates. About one month before that meeting, shareholders will receive the documentation setting out the proposals and a proxy voting form. They will, of course, be able to attend the meeting in person rather than vote by proxy. Assuming approval is given, share certificates for the new companies will be sent out soon after each demerger takes place.

Q: What is in the demerger for Hanson's shareholders?

A: One effect of the demerger will almost certainly be a cut in dividend, according to James Richie of stockbrokers BZW. The consequence of this could well be a falling share price - not good news for a shareholder. But that does not mean you should necessarily sell out now as the share price has already fallen to reflect these concerns. "You may be better off hanging on and waiting for the bids to emerge, if they do emerge, for the component companies," says Mr Richie.

Q: What will happen to Hanson shares held in a PEP?

A: It all depends on a number of issues that have yet to be resolved. One problem is whether all the new companies will be eligible for PEPs. Only the shares (or bonds) of UK - or European Union - quoted companies can be held directly in a PEP. Other foreign companies can be held only indirectly, through a unit or investment trust and within certain limits. At present, there are proposals for one of the new demerged companies, the one concentrating on chemicals, to be listed only in New York and not on the London Stock Exchange. If this proposal stands, the shares will be ineligible for a PEP and will have to be sold.

Q: How will single-company PEPs be affected?

A: Single-company PEPs are normally only allowed to hold shares in one company. The splitting of Hanson into four separate companies, and that of British Gas, may mean problems, but it depends on how the Inland Revenue interprets the rules.

Q: What would be a good outcome of all these talks?

A: Ideally, PEP holders will be allowed to hold all the shares of the demerged companies in a single-company PEP. In this case, one share would have to be nominated as the "designated" share. If you sell the designated share, you will have to sell all the others. If you sell shares in any of the other companies, you will have to re-invest the proceeds in the designated company's shares (unless you decide to withdraw the money from the plan). But you will not be forced to sell any shares and will be able to carry on holding all four companies within the plan. In this event, the plan manager may designate one company or may allow you to choose.

Q: What would be an unfavourable outcome?

A: The Inland Revenue may decide that not all the new companies will be allowed within one single-company PEP. In this case, you may be forced to sell the shares and re-invest the proceeds in just one company. The problem here is that you may be forced to sell shares when the share price is low. It could also be expensive - you might have to incur a number of separate dealing charges. And unless you re-invested the cash in the designated share you could be left with a holding that, depending on the charging structure, would be uneconomic.

Q: Will general PEPs be affected by the demerger?

A: Assuming that shares in all the new companies will be eligible for a PEP, there should not be a problem. But some general PEPs are "corporate PEPs" - low-cost plans sponsored by the company for its own shares. Henderson Financial Management, which runs corporate PEPs for Hanson, is still working out the implications for these of the Hanson demerger.

q Questions and answers compiled by Anthony Bailey.