The Investment column: Tarmac's construction arm spin-off sets bid bells ringing

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The Independent Online
ONE OF the intentions behind Tarmac's forthcoming demerger and christening of its construction business was to make transparent both its value and that of Tarmac's larger aggregates business, which will retain the Tarmac name.

Indeed, the name Carillion was chosen for the demerged construction business because, Tarmac says, of its "connotations with a peel of bells, suggesting the new clarity of the construction business".

But the listing particulars sing a more shrill song. The figures for the two businesses do not tally with Tarmac's most recent divisional breakdown, much to the annoyance of many analysts. Operating profit in the aggregates business was thought to be pounds 150m last year; instead it is pounds 134.9m.

Some observers thought Tarmac had fattened up the less profitable construction business by siphoning off pounds 8m from the aggregate arm's profits. Roy Harrison, who is to be chief executive of the demerged aggregates group, has defended the breakdown, saying that what matters is the transparency of the businesses going forward.

Tarmac needs more than a little resurfacing if it is to reverse its underperformance of the market by up to 70 per cent under in the last five years. The group argues that the demerger will release both sides of the business from the constraints imposed by their different cycles, enabling management to plan investment on a long-term basis.

The argument that transparency will release value is plausible - aggregates companies are trading on multiples of around 12-times earnings, while construction companies are on only seven times. Meanwhile, both groups are sure to benefit from more focused and aggressive management. The question is whether the demerger will take place. All the omens are there for either group to be snapped up by a predator.

Carillion, to be headed by Sir Neville Simms, lacks both a finance director and a chief executive, so there would be few problems with boardroom issues in any tie-up. And coincidentally, one of Tarmac's advisers worked on the proposed demerger of Courtauld's chemicals business, which was pre- empted by a takeover from Akzo Nobel.

As for the aggregates business, the temptation of a purported pounds 35m of cost savings from the aborted Aggregate Industries merger has not been forgotten. Mr Harrison scoffs at suggestions of a merger, saying no discussions have taken place so far. He insists "synergistic partnerships in Europe" are the way forward.

Analysts' estimates value the group at 140p to 162p, with the aggregates part representing between 110p and 129p. JP Morgan expects the aggregates business to deliver pre-tax profits of pounds 112m and earnings of 7p per share this year, Carillion should generate pounds 46m and 3.2p. Sentiment is against the shares, but at 123p they are worth a punt as a bid target.