MAI comes into play

Blue Chip: The money-broking and media group has been identified as the next break-up target
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The Independent Online
BREAKUPS are firmly back in vogue. After Racal and ICI, which respectively spawned mobile phone operator Vodafone and drugs firm Zeneca as high-flying spin-offs in the early 1990s, the market is now entranced with the dismemberment of hotels and restaurants group Forte, win or lose in its battle against Granada.

Thorn-EMI will also shortly titillate the City with a pounds 4bn-plus flotation of EMI and Virgin music, it was confirmed last summer after months of speculation.

Now, in the seemingly never-ending search for fresh targets and with the new year still in nappies, the latest demerger talk has descended firmly on MAI, the TV-to-money-broking group built up from scratch by Labour peer Lord Hollick.

In their latest research note, sector specialists at leading broker NatWest Markets certainly pull no punches. "We believe it is not a case of if this restructuring will happen, but when and by whom. We have no doubt that if current management refuses to undertake the necessary action, someone else will," say analysts Stephen Kirk and Nicola Stewart.

A leveraged buyout of MAI's volatile money-broking operation and trade sale of consumer credit provider Wagon Financial, they argue, would unleash the media and information side that now takes in the Anglia and Southern ITV franchises, pollster NOP and lots more besides.

True, the talk and doubts about MAI's industrial logic are neither new nor welcome to the reticent Labour peer. "Yes, it's an unusual group. Clive Hollick has practically given up trying to justify that there is a coherent strategy," a spokesman said. "But both money broking and media are extremely good businesses. The broking provides cash and a good way of funding other opportunities, which, yes, are increasingly media orientated."

But NatWest's mooted sum-of-the-parts price, 440p against last week's 340p close, is far higher than previous estimates and values the group at pounds 1.4bn against pounds 1.1bn now. Good and bad news perhaps for management, as it turns the speculative screw, but delightful for investors as it highlights the inherent value, come what may.

MAI shares jumped 25p to 349p after NatWest's strong buy before easing on profit-taking towards the end of last week. That continues a strong run last year, when the shares turned in a whopping 38 per cent rise, shrugging off turmoil on the financial side through media growth and anticipation of opportunities ahead.

Taken over by the then plain Mr Hollick in the mid-1970s, the group has transformed itself rapidly in the 1990s. The youngest ever director of merchant bank, at 28, Lord Hollick rescued the debt-laden financial conglomerate JH Vavasseur after the 1974 fringe banking crisis, changed the name - MAI comes from Mills and Allen International, Vavasseur's outdoor marketing subsidiary - and sold off the poster and bus-shelter advertising operations to French rival Havas in 1989.

Money broking - acting as a middleman in foreign exchange, securities and fancy derivatives around the world - provided the financial mainstay for rapid expansion into TV, with Meridian Broadcasting's successful ITV franchise bid for Southern in 1991 and the pounds 292m takeover of Anglia two years ago.

There have been hiccups on the way - notably its failure to win the National Lottery and the Mirror Group, part-owner of the Independent on Sunday - but MAI ended last year with a pounds 200m-plus war chest, largely earmarked for media and entertainment.

Half of that is likely to be swallowed up by the new Channel 5 franchise - if MAI's Channel 5 Broadcasting Consortium fends off last week's court challenge from Virgin. Another pounds 25m to pounds 30m may also go in mopping up a 15 per cent stake in Meridian held by independent producer SelecTV, now in bid talks with Pearson, and much of the rest in internal development.

NatWest sees MAI firmly at a crossroads. Finance still provides half of profits, leaving the group sitting lower rated than other media stocks in the "Other Financials" sector in Financial Times. Whatever MAI's broking strength, its vulnerability was shown in November when a profit warning from rival money broker Exco took some of the steam out of the shares.

In a rapidly changing industry and with the digital TV revolution ahead, NatWest's Mr Kirk says MAI needs to buy in more production capability: a pounds 400m-plus bid for Yorkshire-Tyne Tees, for instance, has long been a market favourite. A broking spin-off would not only provide capital, but would mean re-rating as a pure media stock and cheaper access to equity capital.

The argument will run and run. After broadly tracking the FT-SE All Share index in the 1980s, MAI has explosively outperformed since 1992, and brokers expect the trend to continue in the long term.

MAI

Share price 340p

1994 1995 1996* 1997*

Turnover pounds 695.3m pounds 813.3m pounds 945m pounds 1008m

Pre-tax profits** pounds 115.6m pounds 135m pounds 152m pounds 162m

Earnings p/share** 18.4p 20.1p 23.4p 26.1p

Dividend p/share 7.8p 8.7p 10.0p 11.5p

Price earnings ratio - 16.9 14.5 13.0

Gross yield - 3.2 3.7 4.2

* NatWest Markets forecasts

** Before exceptional items

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