Hanson launches its dustbin

THE INVESTMENT COLUMN

Next Wednesday is decision day for shareholders in Hanson, the UK conglomerate. The end of the month marks the effective demerger of US Industries, the "dustbin" into which Hanson is pouring some of its smaller American businesses, along with pounds 858m of debt. After that, shares in Hanson trade ex-entitlement to the USI scrip - being issued on the basis of one for every 100 shares held - and shareholders must decide whether to sell or hang on to their new holdings.

The consensus has been, ever since the radical demerger move was announced in February, that most will want to sell, but the argument is not all one-way. Indeed USI has a number of attractions:

r The 34 businesses involved include many well known US brand names and occupy strong positions in their markets. They include Jacuzzi, maker of the famous baths, Ertl, a maker of die-cast toys including Thomas the Tank Engine, and Lighting Group, one of the biggest lighting manufacturers in the US.

r It will be a large company in its own right, being the 160th-largest in the country. Net income has grown from $54m (pounds 34m) on sales of $2.63bn (pounds 1.67bn) in 1992 to $81m on $2.99bn last year.

r Management will be strong, led by the chairman David Clarke, who for 22 years was Lord White's right-hand man at the US-based Hanson Industries.

r Added interest is given by the declared interest of Kohlberg Kravis Roberts, the US leveraged buy-out group, in the shares, although that has been downplayed recently.

All these pluses are balanced by one, rather large, negative factor, however, namely the debt which USI's erstwhile parent is dumping on it.

That means it starts life with gearing of around 400 per cent - perilously high by UK standards although a figure less uncommon on Wall Street - ensuring that no dividends will be paid for years to come.

Foreseeing that such an unattractive proposition may turn off a number of small investors, Hanson has laid on a cheap dealing service to allow them to sell, or make up their holdings to a more economic level.

Special arrangements available until the end of July will allow holders who receive less than 100 USI shares - ie those with fewer than 10,000 Hanson shares - to sell for three cents a share, equivalent to less than pounds 2 for 100 shares. Bigger holders can deal at what are said to be competitive rates through Barclays Stockbrokers.

Mr Clarke believes USI's gearing can be rapidly brought down by cash flow and disposals. The plan then is for the group to turn acquisitive and attempt to repeat the success of Hanson Industries.

Assuming no nasty rise in US interest rates or a downturn on America's main streets, USI could then become quite an interesting vehicle to be aboard. But it could take a couple of years before the success of the strategy becomes clear and investors could be in for a rocky ride in the meantime. Selling pressure from UK investors is likely to be strong over the next two months, with the grey market in New York already indicating an opening price at the bottom end of the range in our table. Even so, the small shareholder would be well advised to take the opportunity to get out now while the low-cost dealing service lasts.

Brewer must tap into new market

It is a long time since Wolverhampton & Dudley Breweries last announced a poor set of trading results. Yesterday, the brewer produced them in spades. Not only did the 4.2 per cent rise in interim taxable profits to pounds 17.9m fail to beat the most pessimistic forecast in the City, but there was a paltry rise in the dividend. The interim payout of 5.4p is up only six per cent on last time, compared to the customary increase of 10 per cent.

More worrying is a 1.5 per cent decline in trading profit to pounds 19.4m for the six months to 2 April. This comes when the outlook for regional brewers is brighter than for some time.

W&D is under heavy fire in its Midlands heartland, the main battleground of the beer price war between Bass and Courage. Though wholesale prices have recently been rising, there is a strong chance that hostilities will resume following this week's warning from Bass that it will fight hard if Scottish & Newcastle gains regulatory approval to take over Courage.

Profit margins on beer in the Midlands are already the thinnest in the UK, with pubs selling ale at pounds 1.15 a pint, a good 20p cheaper than the national average outside London. Moreover, much of W&D's pub estate is made up of traditional boozers which rely heavily on low-margin beer sales. The pubs lag well behind the rest of the market on higher margin food sales.

W&D's problems can really only be resolved by purchasing a few hundred pubs. The Camerons brewery in the North-east, which W&D bought a couple of years ago, is operating well below capacity and it will lose out to Vaux, the Sunderland-based brewer, unless it can tie beer sales to more houses in the area.

Century Inns, the pub company that failed to float on the stock market, would fit the bill nicely. Most of its 320 pubs are in North Yorkshire and the North-east, which would dovetail neatly with Cameron and broaden W&D's geographical coverage the other side of the Pennines.

The pressure is now on W&D to restore investor confidence. The shares, which have outperformed the regional brewing sector all year, dropped 15p to 529p. On reduced annual pre-tax profit projections by analysts of circa pounds 39m, the shares now trade at a 7 per cent discount to the market on a p/e of 13.46. And the gross yield, on forecast dividends of 14.7p, is an unattractive 4 per cent.

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