Predators begin stalking EMI as it separates from Thorn

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The Independent Online
The waiting is over; the long, tortuous process at last complete. Today, Thorn EMI, a stock market name for 16 years, becomes the dust of history as Thorn and EMI start life as two stand-alone companies.

Shares of the old group closed on Friday at 1,833p. It is likely that the Thorn end of the business, a rental operation, will open at 410p with the much more glamorous EMI showbiz side nudging 1,400p.

However, profit taking could be an important influence. The temptation to snatch at least some reward from the shares' strong run could prove irresistible. The price has climbed from 1,421p in the past year.

Much of the attention will be focused on EMI, a company few believe will retain its independence for long. As the EMI music side has grown, rarely striking a discordant note, takeover rumours have swirled around. The rest of the business, once ranging over consumer products, defence and lighting as well as rental, was regarded by many as offering a type of poison pill protection.

But now EMI has to survive without its boring partner. It may be hard pressed to do so.

Disney, the US giant, hovers. Its music business could do with a lift from the EMI repertoire. Bertelsmann, the German group, and Seagram, the Canadian drinks giant with an insatiable taste for showbiz, are among others seen as likely predators.

In all the excitement the rental side has been overshadowed. Solid but dull is the market verdict, but it could surprise. Its Crazy George stores, aimed at those who cannot get credit, and its diversification from television and video renting into computers offer encouraging possibilities. The US side, brushed by controversy in the past, now accounts for approaching 40 per cent of group sales. And Thorn's renting success story could be repeated in Europe.

The arrival of two powerful groups in place of one even more powerful player has consigned Cookson, the conglomerate, to a life outside Footsie. Its removal to accommodate the two Thorn elements occurred as the blue- chip index reached a 3,872.9 peak.

After last week's remarkable strength, estimates of Footsie reaching 4,000 by the end of this month no longer look outrageous and 4,000 by the year-end now seems rather cautious. It will be interesting to see if the bulls lift their forecasts or decide to rest on their laurels.

Thorn and EMI were fortunate with their timing. It requires a special slice of luck to make a market debut when shares are in record-breaking mood.

They will have to split today's limelight with a former demerger share, Argos, the catalogue stores chain. Once part of BAT Industries, it was hived off as an independent business following the unsuccessful break- up bid by tycoon- turned-politician Sir James Goldsmith (and his friends) for the tobacco giant.

Argos reports interim figures. Tony Cooper at Greig Middleton expects pounds 25m, up from pounds 21.8. For the year he is looking for pounds 142.5m (pounds 124.4m).

The retailer is one of the few top companies prepared to hand out cash to shareholders through a special dividend rather than a share buy-back. It made a 42p-a-share payment in May. Unless it indulges in an expansionary buying spree, further pay-backs are likely, with its free cash flow running at around pounds 130m a year, nearly three times capital spending.

Mr Cooper sees little prospect of a big cash-sapping deal. He says: "The likelihood of the right sort of bolt-on business is looking remote ... given the stringent criteria that Argos has set, and its experiments in screen- based home shopping are in a very early stage. That leaves the European option, which is under consideration, with Holland and Germany likely prospects for limited experiments."

There is no doubt that the special dividend is more shareholder-friendly than a share buy-back. Quite simply, all shareholders get cash. In the case of a buy-back the loot is merely offered to institutional investors who are on hand to sell to the company's stockbrokers as soon as they appear with the necessary instructions. It would be impracticable and too costly, it is argued, to spread the buy-back among all shareholders, perhaps through a tender-style offer.

So institutions pocket the cash - getting tax benefits in the process - and the company's finance director can expect improved earnings per share and does not witness a share fall as a dividend payment is stripped out. But those legendary shareholders, Aunt Mabel in Scarborough and the Colonel in Cheltenham, must wait and hope the buy-back lifts the market price. Often it doesn't.

Tomorrow shareholders in National Power collect one of the biggest special dividends on record - 100p a share. When the shares went ex-dividend they suffered the obligatory fall, although most small shareholders will applaud the power group's democratic approach to the teasing problem of how a company treats cash it no longer wants.

BSkyB, Rupert Murdoch's satellite television service, is another cash generative group reporting this week. Tomorrow it announces year's results. Around pounds 255.9m, a 56 per cent jump, is expected. A 140 per cent dividend hike to 6p is also likely.

Orange, the mobile telephone group, is another with figures tomorrow. Its maiden interims, however, are likely to be coloured red - perhaps to the tune of pounds 130m. The full year loss could be around pounds 230m.

Rentokil is the other major with results this week. It produces interims on Thursday. They will be the first offering since the services group won its bitter struggle for control of BET. Paul Morland and David Allchurch of NatWest Securities expect the basic Rentokil business to lift operating profits by 12 per cent. They look for pre-tax profits of pounds 138m, up 39 per cent.

Nyren Scott Malden at Barclays de Zoete Wedd is on pounds 137m.

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