Putting a price on Thorn's head

THE INVESTMENT COLUMN
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The Independent Online
Whispers of a break-up of Thorn EMI into its constituent parts have fuelled the company's share price all year and, with the annual meeting on Friday concluding two days of strategic navel-gazing, the rumour mill has been busier than ever.

The shares, which have risen in a straight line since January, added another 19p to pounds 13.77 yesterday, up a third since the start of the year. They have outperformed the market by a fifth.

What Sir Colin Southgate, who took the helm a decade ago when Thorn was a lumbering conglomerate, will say on Friday is unclear. But it is starting to look as if much of the good news for investors is already in the price.

Sir Colin has responded to the gossips by suggesting that anyone wanting to secure a part of the group would have to bid for the whole lot.

His remarks were made in the knowledge that not many companies would have the inclination to break up the business. Now it looks as if it wouldn't even be worth their while if they did.

Thorn's share price is fast approaching the straight break-up value of its three main businesses, which analysts estimate could be worth a total of pounds 6.5bn - split into pounds 4.6bn for the EMI music business, pounds 1.5bn for the rentals side, and pounds 300m for the HMV record retailing arm. At the current price, which values the shares on a prospective price-earnings multiple of almost 20, Thorn is valued at pounds 5.91bn.

Against that background, it is perhaps surprising that the market still believes a full bid, or straight demerger, to be a realistic possibility as a way of unlocking shareholder value.

Some analysts, however, believe a third option remains - the sale to the highest bidder of the EMI business on its own.

The City's estimated value for EMI of pounds 4.6bn reflects the 20 times post- tax earnings multiple on which the shares of Paramount, the best single comparison, currently trade.

Conceivably, Thorn, one of the five largest and most cherished jewels in the pounds 20bn global music business, could be worth more.

A sale multiple of 25 times earnings for EMI is not out of the question, and even 30 is not beyond the realms of reality when the music company's earnings prospects over the next three years are taken into account.

Whether Thorn would actually want to give up these prospects is unclear and arguably the company would be better advised to delay any break-up or sale for at least another year.

All three of Thorn's businesses are expected to show compound growth of 15 per cent a year until the end of the 1997/98 year.

That sort of growth might itself justify the current rating of Thorn's shares but it would be wrong to pin too many hopes on the break-up story. After six months of strong outperformance, the risk-reward balance is looking increasingly unfavourable.

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