Investment: Tarmac demerger may add 33% to share value
On some estimates, the split announced on Tuesday could add up to 33 per cent to Tarmac's share value as investors realise that two companies are worth more than one entity.
Industry experts believe the stock - one of the sector's great underperformers - could go even higher on the back of speculation of a takeover of the two companies. The building materials group would be the more attractive target, but even the low-margin construction group could interest some large contractors.
On a purely financial basis, Mike Betts, building analyst at JP Morgan, believes the split - to be completed in six months - values Tarmac at about 150p, compared to 113.25p yesterday.
The building materials unit will be by far the more valuable of the two. According to Mr Betts, putting 1999 operating profit estimates of pounds 181m on a multiple of nine - in line with other materials companies - gives an enterprise value of between pounds 1.5bn and pounds 1.7bn. A similar exercise on the construction business, with profits set to be pounds 38m and a lower multiple of seven, gives a value of about pounds 260m. Take off debt of pounds 300m and other minor items, and the value of the total group comes out at over pounds 1.4bn. This translates to 150p per share, with about 120p accounted for by building materials and more than 20p by construction.
However, most experts agree that further upside could be provided by takeover action. David Taylor at Teather & Greenwood said: "The split will make a takeover of the building materials business more likely. The contracting arm has been essentially a poison pill."
The list of potential bidders is topped by Aggregate Industries. Others include France's Lafarge, the Irish group CRH and Australian giant Pioneer.
In the UK, RMC, Hanson and cement makers Blue Circle and Rugby may be interested. The contracting arm could be taken out, with Amec and John Mowlem the most likely buyers.
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