Outlook: Forget the ethics, look at the money

ETHICAL INVESTMENT doesn't pay, it would seem. The tobacco industry is still many people's favourite bogey, a medically proven killer and sometimes liar, but following settlement of most outstanding litigation in the US, boy has it also become the City's favourite glamour stock.

Most astonishing has been the transformation brought about at BAT Industries. For years, BAT's chosen strategy was aggressively to diversify away from the dreaded weed, taking the company into a series of dull but reliable alternatives. Fine, that was the accepted way for companies in pariah industries in those days.

However, even after conglomerates started to become unfashionable, BAT largely refused to accept the demerger and divestment case, insisting that no value would be created by going this route. An ultimately fruitless breakup bid from Sir James Goldsmith and associates failed to shake BAT's faith in the multi-faceted business group.

It's hard to be definite about when the scales finally fell from the company's eyes, but under the present chairman, Martin Broughton, BAT has embraced the stock market's favourite mantra of "demerge, focus and consolidate" with a success which almost defies belief. From beyond the grave, Sir James will be toasting his own foresight. What has been accomplished over the last year is a corporate restructuring of textbook perfection and eloquence.

First came the demerger of BAT's insurance interests and their simultaneous consolidation with Zurich Insurance to create a new pan-European insurance goliath. The merger of the remaining tobacco operations with Rothmans to form a cigarette company on a par with Philip Morris of the US completes the process. Along the way BAT has created untold shareholder value.

At the end of August, just before the insurance demerger, BAT Industries shares were trading at 500p each. Today shares in British American Tobacco alone are worth 626p. To that must be added the value of a share in Allied Zurich of 987p. The effective rise in value has therefore been more than three-fold. Few demergers and subsequent consolidations can be said to have paid off so handsomely.

The industrial logic of BAT's latest piece of restructuring, the merger with Rothmans, seems hard to fault, though the creation of a company with 16 per cent of the world cigarette market and dominance in 55 countries makes the mind boggle. The only obvious fly in the ointment is that in so doing, BAT adds a powerful minority shareholder with 35 per cent of its capital. Persuading the South African Rupert family to take a third of this holding in non-voting stock only partially solves the problem.

At this stage, the two sides speak in unison on strategy and management, but the trouble with big minority shareholders with substantial business interests elsewhere is that they are not always prone to remain that way.

Still, for the time being all is sweetness and light and shareholders must thank their lucky stars that Johann Rupert proved as pliable as he did.

Like most modern trends, the big corporation's fondness for the global mega-merger started in the US. Intriguingly, however, many of the most recent instances were born in Britain - Diageo to create a group with approaching 20 per cent of the world branded spirits market, BTR and Siebe, and BP Amoco. Virtually unnoticed, Blue Circle has also through acquisition accumulated a huge chunk of the world cement market.

Many of these mergers are monopolistic in intent - an attempt to recreate local market dominance on a global scale. But they are also a response to the intensity of international competition as industries become progressively global in nature, and as such cannot be dismissed as entirely a bad thing. From this perspective, they seem more a product of corporate weakness than strength. Certainly we seem destined to see a lot more of them.

Start your day with The Independent, sign up for daily news emails
ebooksA celebration of British elections
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Editor-in-chief - Financial Services - City, London

£60000 - £70000 per annum + benefits : Ashdown Group: A highly successful, glo...

Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Guru Careers: Management Accountant

£27 - 35k + Bonus + Benefits: Guru Careers: A Management Accountant is needed ...

Guru Careers: Project Manager / Business Analyst

£40-50k + Benefits.: Guru Careers: A Project Manager / Business Analyst is nee...

Day In a Page

General Election 2015: ‘We will not sit down with Nicola Sturgeon’, says Ed Balls

'We will not sit down with Nicola Sturgeon'

In an exclusive interview, Ed Balls says he won't negotiate his first Budget with SNP MPs - even if Labour need their votes to secure its passage
VE Day 70th anniversary: How ordinary Britons celebrated the end of war in Europe

How ordinary Britons celebrated VE Day

Our perception of VE Day usually involves crowds of giddy Britons casting off the shackles of war with gay abandon. The truth was more nuanced
They came in with William Caxton's printing press, but typefaces still matter in the digital age

Typefaces still matter in the digital age

A new typeface once took years to create, now thousands are available at the click of a drop-down menu. So why do most of us still rely on the old classics, asks Meg Carter?
Discovery of 'missing link' between the two main life-forms on Earth could explain evolution of animals, say scientists

'Missing link' between Earth's two life-forms found

New microbial species tells us something about our dark past, say scientists
The Pan Am Experience is a 'flight' back to the 1970s that never takes off - at least, not literally

Pan Am Experience: A 'flight' back to the 70s

Tim Walker checks in and checks out a four-hour journey with a difference
Humans aren't alone in indulging in politics - it's everywhere in the animal world

Humans aren't alone in indulging in politics

Voting, mutual back-scratching, coups and charismatic leaders - it's everywhere in the animal world
Crisp sales are in decline - but this tasty trivia might tempt back the turncoats

Crisp sales are in decline

As a nation we're filling up on popcorn and pitta chips and forsaking their potato-based predecessors
Ronald McDonald the muse? Why Banksy, Ron English and Keith Coventry are lovin' Maccy D's

Ronald McDonald the muse

A new wave of artists is taking inspiration from the fast food chain
13 best picnic blankets

13 best picnic blankets

Dine al fresco without the grass stains and damp bottoms with something from our pick of picnic rugs
Barcelona 3 Bayern Munich 0 player ratings: Lionel Messi scores twice - but does he score highest in our ratings?

Barcelona vs Bayern Munich player ratings

Lionel Messi scores twice - but does he score highest in our ratings?
Martin Guptill: Explosive New Zealand batsman who sets the range for Kiwis' big guns

Explosive batsman who sets the range for Kiwis' big guns

Martin Guptill has smashed early runs for Derbyshire and tells Richard Edwards to expect more from the 'freakish' Brendon McCullum and his buoyant team during their tour of England
General Election 2015: Ed Miliband's unlikely journey from hapless geek to heart-throb

Miliband's unlikely journey from hapless geek to heart-throb

He was meant to be Labour's biggest handicap - but has become almost an asset
General Election 2015: A guide to the smaller parties, from the the National Health Action Party to the Church of the Militant Elvis Party

On the margins

From Militant Elvis to Women's Equality: a guide to the underdogs standing in the election
Amr Darrag: Ex-Muslim Brotherhood minister in exile still believes Egypt's military regime can be replaced with 'moderate' Islamic rule

'This is the battle of young Egypt for the future of our country'

Ex-Muslim Brotherhood minister Amr Darrag still believes the opposition can rid Egypt of its military regime and replace it with 'moderate' Islamic rule, he tells Robert Fisk
Why patients must rely less on doctors: Improving our own health is the 'blockbuster drug of the century'

Why patients must rely less on doctors

Improving our own health is the 'blockbuster drug of the century'