Investment Column: The break-up value of Courtaulds

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The Independent Online
THESE DAYS the City resounds with cries for "shareholder value", so it was only a matter of time before Courtaulds did the decent thing and decided to break itself up. Over the last five years the coating to chemicals group has underperformed the market by almost 80 per cent. With few signs of things getting any better, the case for a demerger was hard to ignore.

The important question now it how to value the separate businesses.

The coatings and sealants business is Courtaulds' star performer. A world leader in the marine and aerospace markets, the division has sales of just under pounds 1bn a year and makes an operating profits approaching pounds 100m.

Putting it on a similar rating to international rivals, it is probably worth anywhere from pounds 1bn to pounds 1.3bn. Courtaulds already claims it has had a flurry of interest from bankers for the polymers division which has put up for sale.

In a competitive auction the group could get a price at the top of the pounds 200m to pounds 300m range the City is predicting.

The tricky part comes in assessing the value of the chemicals and fibre business and in particular Tencel, the "wonder" fibre that so far has had a less than wonderful impact on profits.

Courtaulds has poured pounds 300m into developing Tencel but the economic crisis in Asia has caused sales to collapse and the business is losing money. Tencel could eventually come good. It certainly has competitive advantages over other fibres, the potential market is huge and competition is still limited.

However sales in Asia are likely to remain poor for the next six months at least. If you throw in Tencel for free, the chemicals and fibres division, with annual sales of pounds 875m, is still worth at least pounds 400m.

Adding all that up and knocking off pounds 430m of debt, Courtaulds is worth, say, from 325p to 350p a share, compared to a closing share price of 331p, up 59.5p on the day.

But the final break-up value could be much higher. Predators must already be circling the coating and sealants division and may strike before the business is floated. Courtaulds shares still look reasonable value.