Shares: Wassall is not too big for its boots

'Conglomerate' is a dirty word now, but one deal-maker says it can expand without becoming bloated
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The Independent Online
SO HAS Lord Hanson, king of the takeover jungle, really beaten the death drums for that much maligned species, "the conglomerate"?

Certainly the label and the images it inspires - corporate raiders slashing and burning across industry, collecting strings of unrelated businesses - are firmly out of vogue.

BTR has managed to throw off the label, and former enfant terrible Nigel Rudd, head of Williams Holdings, seems to be firmly part of the establishment. Indeed, any hint of the dreaded term "conglomerate" leads to Williams public relations people screaming "We're a focused industrial company," down the telephone.

Meanwhile, Greg Hutchings, the former Hanson protege at the head of Tomkins, has seen his shares dramatically underperform in the last three years after adding the baker Ranks Hovis McDougall to a group that makes bicycles, lawn mowers and Smith & Wesson revolvers. This month's pounds 768m purchase of the US motor-parts maker Gates Rubber was welcomed as a return to engineering roots, but has also added "guns 'n' hoses" to "guns 'n' buns" in the City's vocabulary of sniggering sobriquets.

For Chris Miller, another Hanson protege, and his partner David Roper, who head the glue-to-bottle tops group Wassall, the "end of an era" question is too simplistic. Distinguish first between stable, diversified groups and "acquisitive conglomerates", they say. The trick with the latter is to get focused before, like Hanson (and Tomkins potentially), you run out of deals. Or else, like Wassall, do not grow too big in the first place.

"Hanson carried on too long, lost its market rating, had to buy lower quality businesses and hit a dead end," says Mr Roper. "We will always be in a position to do another deal and the market will want us to. Where we can't add anything more, we will float, demerge or sell before getting too big."

Mr Miller and Mr Roper met as accountants working in Switzerland in the 1970s, before joining Hanson and the merchant bank Warburg respectively. Their links with Wassall's US chief, Kevin Doyle, also date back to the Swiss days, so the team gels on both sides of the Atlantic.

The two men started building their conglomerate by reversing the Miller family office furniture business into J W Wassall, a tiny Leicestershire shoe retailer, in 1988. Wassall was then worth just pounds 1.9m; now it is worth pounds 515m.

The shoe shops were quickly sold and a series of deals followed: Hille Ergonom furniture and Antler luggage for pounds 29m in 1989; bottle-top maker Metal Closures for pounds 47m in 1990; DAP adhesives in the US for pounds 58m in 1991; and copper wiring group General Cable, also in the US, for pounds 177m two years ago.

The group still smarts, though, from being outbid by Laporte for adhesives maker Evode in 1993. In many ways Evode was a better fit with DAP, and, of course, the "conglomerate" charge was trundled out against them.

Mr Miller points out that there is more to Wassall than the asset-stripping that served Hanson so well and the financial engineering that drives so many deals. The group now looks for businesses that have under- rather than over-invested. This is partly through necessity - the bargains, gung ho markets and liberal accounting of the 1980s are long gone - and partly because of the challenge.

"One of the best ways to increase profit is to increase investment," Mr Miller says. "We still get hordes of merchant bankers offering us deals, saying 'it'll lift your earnings in year one'. And that's that. We have to keep saying, 'that's not what it's all about'."

The figures bear out the rhetoric: in 1993 and 1994, Wassall had capital investment of pounds 13.4m and pounds 21.8m, 60 to 70 percent more than depreciation. For 1995 and 1996, estimates are pounds 30m and between pounds 40m and pounds 45m, against depreciation of pounds 17m and pounds 19m.

Since 1988, Wassall's profits have leapt from just pounds 343,000 to brokers' estimates of around pounds 50m for 1995 when it reports on 20 March. Earnings per share have grown from 3.8p to a forecast 17p in 1995.

On a five-year view, the shares have outstripped the market by nearly two-and-a-half times. Last year, however, they under-performed, after a pounds 20m charge for restructuring at General Cable and as conglomerates went out of fashion.

At 273p, the shares command a p/e of around 151/2, dropping to just 13 on 1996 profit forecasts of pounds 60m.

In November, Wassall spent pounds 17m on a 68 per cent stake in the Singapore- quoted trailer maker York Pacific, which gives it a beachhead in the Far East. It knows the management well and may use the quote to expand.

Investors will have to be patient for deals, but should follow advice from brokers and buy before a re-rating with the results.

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