No easy life after Hanson
Sunday 06 October 1996
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.
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