News Analysis: End of guns-to-buns group sounds last post for the big conglomerates

Is Tomkins' spinning off of Rank Hovis McDougall the last gasp of the corporate dinosaurs which once ruled the earth?
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The Independent Online
TOMKINS, THE diversified engineering and food conglomerate, yesterday confirmed plans to de-merge its food manufacturing division in a move which signals the end of Britain's last remaining major conglomerate built up during the Eighties.

Following similar moves by Hanson, Williams Holdings and BTR in recent years, Tomkins is to slim itself down to concentrate on a narrower spectrum of businesses.

Greg Hutchings, Tomkins chairman said: "Business is a dynamic thing. You've got to change with the times. We always follow industry developments and have decided that the time is right to focus on our industrial businesses."

Announcing flat pre-exceptional annual profits of pounds 496m, Mr Hutchings said Tomkins will spin off its Rank Hovis McDougall food business into a separately quoted company early next year.

RHM, which includes brands such as Hovis, Mothers Pride, Bisto gravy and Robertson's jams, is expected to be valued at as much as pounds 2bn. Another major division, which includes lawnmowers and bicycles is to be sold.

The deals will leave Tomkins focused on two divisions; automotive parts such as windscreen wipers and fuel caps and construction which includes businesses making baths, axles and plastic panels.

Mr Hutchings will head the rump of Tomkins while the group's old food business will be chaired by Ian Duncan, he Tomkins group's former deputy chairman, who had reportedly disagreed with Mr Hutchings over strategy.

The decision to break up Tomkins marks the end of a 16 year policy of "big is best" for Mr Hutchings, who caught the conglomerate bug at Hanson where he worked in the early Eighties. When he joined Tomkins in 1983 the company was a West Midlands manufacturer of buckles and fasteners with profits of pounds 1.6m. He built the group the group up through an array of disparate acquisitions including the Smith & Wesson gun company.

But its tag as a conglomerate was finally sealed in 1992 when he paid pounds 970m for bread maker Rank Hovis McDougall. The company has been known as the "guns-to-buns" group ever since.

But like other former conglomerates of the Eighties like Hanson and BTR, Tomkins has found the going tough more recently. In the last year they have tumbled from 350p to just 290p, and Tomkins lost its place in the FTSE 100 index in March. Investors have gradually fallen out of love with diversified industrial groups, preferring the new mantra of focus.

One analyst said: "The point is that if a financial institution wants to buy stock in a food manufacturer they will choose a focused food group, not a conglomerate. There is more transparency and investors have greater assurance that the company's management is devoting itself to its customers.

It was all so different in the Seventies and Eighties as conglomerates like Hanson and Williams Holdings and their respective leaders Lord Hanson and Nigel Rudd were lionised in business circles. The maxim chanted by Lord Hanson then was that it didn't matter what business a company was in, a good management team ought to be able to get the best out of it.

That philosophy, combined with a plentiful supply of under-performing, inefficient targets allowed the conglomerates to grow fat.

Another argument in favour of conglomerates was that assembling a group of disparate parts could help the whole if they had different cash requirements. The idea was that a cash generative business in a mature industry, like brewing or gaming machines, could be used to help fund a rapidly growing, cash hungry sector to produce a steady earnings stream.

As companies like Hanson, BTR, Williams became the business icons of their age, they also spawned a host of lesser imitators. In addition to Tomkins, Wassall was also developed by an ex-Hanson executive although it too has now started to rationalise its diverse operations.

It was Hanson that was first to raise the white flag in recognition that the conglomerates' day had passed. In January 1996 it announced plans to spilt itself into four businesses, spinning off Imperial Tobacco into a separately quoted company.

The other diversified industrials soon followed. BTR unveiled a plan to concentrate on a smaller range of businesses in auto parts before its merger with Siebe to form Invensys. Williams has also started to re-invent itself as a more focused fire and security services company. Even before yesterday's announcement Tomkins had already asked the stock exchange to be reclassified as an engineer rather than a diversified industrial. A conglomerate lover to the last Mr Hutchings hung on as long as he could. But a variety of schemes, including the return of pounds 658m to shareholders by way of share buy-backs, failed to silence the critics.

Yesterday , this negative sentiments seemed to continue with Tomkins receiving scant credit for its move which was greeted by a 9p fall in the share price to 290.5p.

"Corporate break-ups are not a panacea for poor businesses." said Ian Rennardson at Merrill Lynch. "The food manufacturing business had organic growth of just 1.4 percent last year." Daniel Bevan at Credit Lyonnais was also sceptical. "The demerger smacked of a hurried decision ... The problem is that people feel Hutchings is manoeuvring to his advantage but are not quite sure if it's to the shareholders' advantage." he said.

Analysts estimates of the value of Rank Hovis McDougall vary from pounds 1.5bn to pounds 2bn. Though the demerger process is expected to take six-to-nine months, it is possible that a trade buyer could enter the fray before then. Some analysts have mentioned US venture capital fund Hicks, Muse, Tate Furst as a possible buyer after its takeover of Hillsdown Holdings a few months ago.

And even now, whiffs of the old conglomerate mind-set remains. Mr Hutchings has no plans to sell gunmaker Smith & Wesson even though it still sits oddly in the industrial portfolio. Mr Hutchings explained that the time was not right to sell the business, as it is the subject of litigation in the US over the manufacture and distribution of handguns. He denied he was keeping the company as a memory of past glories. "We are running a business. We don't do things for sentimental reasons."

This may be so. But business trends come and go. And if the management pendulum ever starts to point in the direction of the conglomerate again, it is hard to believe that Mr Hutchings will not be leading the charge.