No easy life after Hanson

Last week saw the stock market debuts of two substantial businesses, both in mature markets, both dogged with concerns over health and safety, and despite strongly cash-generative qualities, both with questions over their future growth.

The two, Imperial Tobacco and Millennium Chemicals, are the latest offspring of the Hanson demerger process. Millennium contains what is left of the Hanson chemicals empire. Imps, as it was known before its acquisition by Hanson in a vicious takeover fight in the late 1980s, will be one of only two tobacco concerns quoted on the London Stock Exchange, the other being BAT Industries, making Imperial the only pure tobacco player.

Hanson shareholders will decide over the next few weeks whether to hang on to the new shares or whether discretion should be the better part of valour and to cash in for a quick profit.

With Millennium, British shareholders are presented with a further dilemma. Although the company is headquartered in Grimsby, for tax reasons the shares are traded only on the New York Stock Exchange. So investors over here have to face the added uncertainty of currency risk. In addition, dividend payments, it had been agreed, would be made in dollars. For smaller investors, the cost of converting dollar cheques would be prohibitive. Christopher Collins, Hanson's deputy chairman, has conceded the company will look into whether UK investors could, after all, be paid in sterling. Nor can Millennium shares be put into personal equity plans (PEPs), another disincentive to investors who have their Hanson shares held in this fashion.

The likely result is that many UK shareholders will sell out.

But hang on - something similar happened when Hanson demerged US Industries last year. After dealings began, the price remained fairly static for the first few months as British investors got out and depressed the price - only for it to rise strongly thereafter, as US investors piled in to take up the slack. The shares are now double their level when they first traded, albeit helped along by Wall Street's raging bull market.

For Hanson shareholders, Millennium does not make quite the same impact as Imperial. They receive one share in Millennium for every 70 Hanson shares held. For Imperial the ratio is one-for-10.

Millennium, as expected, has already begun to falter, since dealings began on Wednesday at $24 (pounds 16), and now stands a touch over $22. Imperial, by contrast, has enjoyed a rip-roaring start, boosted by takeover talk. From 375p on Tuesday, the shares have soared to 416p.

As businesses, both have their pluses. Millennium is made up of Quantum, SCM, and GlidCo, which specialises in fragrances. The largest producer of polyethylene products in the US, Millennium is also the second largest US maker of titanium dioxide, and the third largest in the world, as well as being a leading paint stuffs manufacturer.

Imperial is the second largest tobacco concern in the UK, with a 38 per cent market share - a fraction behind Gallaher, purveyors of Benson & Hedges and Silk Cut, among others.

The UK is still its most important market - it has no sales in the US - but sales from the rest of the world are mounting, and now represent 13 per cent of total profits. Since 1991, Imperial's overseas profits have grown at a compound rate of 27 per cent; the big areas for growth are places such as China, and Central Europe.

While Millennium must meet stringent environmental safeguards, Imperial is faced by the tobacco health lobby. So far, this is a serious problem only in the US, where Imperial is absent. But the prospect of litigation emerging at some future date, and more prohibitions on smoking in the West, are of concern. Virginia Bottomley, as Health Secretary, pledged to cut smoking rates by 40 per cent over the next decade. Even if this is unobtainable, smoking in the West is a declining habit - although Imperial has been successful at sustaining its volumes in the UK, by bumping up market share.

Against these points, Imperial generates cash at an awesome rate. Stockbroker ABN-Amro Hoare Govett estimates its cash flow over the period 1995-1998 will be greater than its earnings per share - bettering even the likes of such renowned cash generators as Reuters and Rentokil. That means it can pay down the relatively high debt burden it has inherited from Hanson and still have plenty left to fund expansion.

Millennium, by contrast, is coming to the market when the chemicals cycle is on the wane. So the prospect of immediate growth is a tougher prospect for its management. The polyethylene market is already under price pressure, which could see earnings per share actually decline over the next couple of years. And its high indebtedness, when income may be under pressure, gives Millennium less flexibility than Imperial. If the going gets tough, however, it will be able to cut capital expenditure from the current level of around $300m a year to $100m.

Both companies can boast highly regarded management teams. Imperial, now big enough to be an FT-SE 100 constituent, will be a feature of investors' portfolios for a long time to come. Its stated aspiration of a progressive dividend policy makes it a share to hang on to. Millennium could prove interesting - if only because it may also may prove attractive to a predator. But UK investors may not want to follow the fortunes of a company across the Atlantic, and may feel it easier to sell.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Learning and Development Programme Manager

£35000 - £38000 per annum + benefits : Ashdown Group: A highly successful, int...

Recruitment Genius: Claims Administrator

£16000 - £18000 per annum: Recruitment Genius: A position has arisen within th...

Ashdown Group: Development Manager - Rickmansworth - £55k +15% bonus

£50000 - £63000 per annum + excellent benefits : Ashdown Group: IT Manager / D...

Recruitment Genius: Security Officer

£16500 per annum: Recruitment Genius: Applicants must hold a valid SIA Door Su...

Day In a Page

The saffron censorship that governs India: Why national pride and religious sentiment trump freedom of expression

The saffron censorship that governs India

Zareer Masani reveals why national pride and religious sentiment trump freedom of expression
Prince Charles' 'black spider' letters to be published 'within weeks'

Prince Charles' 'black spider' letters to be published 'within weeks'

Supreme Court rules Dominic Grieve's ministerial veto was invalid
Distressed Zayn Malik fans are cutting themselves - how did fandom get so dark?

How did fandom get so dark?

Grief over Zayn Malik's exit from One Direction seemed amusing until stories of mass 'cutting' emerged. Experts tell Gillian Orr the distress is real, and the girls need support
The galaxy collisions that shed light on unseen parallel Universe

The cosmic collisions that have shed light on unseen parallel Universe

Dark matter study gives scientists insight into mystery of space
The Swedes are adding a gender-neutral pronoun to their dictionary

Swedes introduce gender-neutral pronoun

Why, asks Simon Usborne, must English still struggle awkwardly with the likes of 's/he' and 'they'?
Disney's mega money-making formula: 'Human' remakes of cartoon classics are part of a lucrative, long-term creative plan

Disney's mega money-making formula

'Human' remakes of cartoon classics are part of a lucrative, long-term creative plan
Lobster has gone mainstream with supermarket bargains for £10 or less - but is it any good?

Lobster has gone mainstream

Anthea Gerrie, raised on meaty specimens from the waters around Maine, reveals how to cook up an affordable feast
Easter 2015: 14 best decorations

14 best Easter decorations

Get into the Easter spirit with our pick of accessories, ornaments and tableware
Paul Scholes column: Gareth Bale would be a perfect fit at Manchester United and could turn them into serious title contenders next season

Paul Scholes column

Gareth Bale would be a perfect fit at Manchester United and could turn them into serious title contenders next season
Inside the Kansas greenhouses where Monsanto is 'playing God' with the future of the planet

The future of GM

The greenhouses where Monsanto 'plays God' with the future of the planet
Britain's mild winters could be numbered: why global warming is leaving UK chillier

Britain's mild winters could be numbered

Gulf Stream is slowing down faster than ever, scientists say
Government gives £250,000 to Independent appeal

Government gives £250,000 to Independent appeal

Donation brings total raised by Homeless Veterans campaign to at least £1.25m
Oh dear, the most borrowed book at Bank of England library doesn't inspire confidence

The most borrowed book at Bank of England library? Oh dear

The book's fifth edition is used for Edexcel exams
Cowslips vs honeysuckle: The hunt for the UK’s favourite wildflower

Cowslips vs honeysuckle

It's the hunt for UK’s favourite wildflower
Child abuse scandal: Did a botched blackmail attempt by South African intelligence help Cyril Smith escape justice?

Did a botched blackmail attempt help Cyril Smith escape justice?

A fresh twist reveals the Liberal MP was targeted by the notorious South African intelligence agency Boss