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.

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