The Thorny question of valuation

The proposed break-up of Thorn EMI has been talked about for so long that if, and when, it is finally announced next week the sense of anti-climax will be palpable. But with Sir Colin Southgate reliably expected to set the ball rolling with Tuesday's third-quarter figures, attention will really start to focus on what the demerged parts might be worth.

Under the plan, investors are expected to receive two shares in exchange for their Thorn EMI units, one in the larger EMI music business and another in Thorn's rental operation. With about 12 per cent of the shares held in the US, there will probably be a London and New York listing for the new equity.

The company first mooted the idea of a demerger last summer, but the process has been complicated by its tax implications. The group's different operations are governed by more than 20 tax jurisdictions, but it finally appears that the group has ironed out all the wrinkles and is ready to press ahead.

As one of the least well kept secrets, much of the hidden value of the two parts has already seeped out into the marketplace and over the past year the shares have soared. From little more than pounds 10 a share 12 months ago the stock broke through pounds 17 last month, before settling since then to yesterday's pounds 16.69. During that period Thorn has outperformed the rest of the market by a thumping 30 per cent.

The two businesses are both attractive in different ways. EMI, which for the purposes of the demerger will include the HMV record shop chain, has an enormously valuable back catalogue of hit songs and an enviable array of stars on its books. The record-breaking $85m four-album deal with the American singer Janet Jackson bolstered the division's Virgin label, albeit at a price that had the company's rivals spitting tacks.

Its publishing arm, the ultimate cash-cow with fantastic margins, has the rights to songs from performers such as Rod Stewart and Take That. For the cost of administering that list, Thorn coins in the lucrative rights to its songs from radio stations, advertising agencies and film companies.

EMI is the side of the business that has received most attention, and it's the bit most likely to attract a bidder after the two-way split, but Thorn has its own appeal with good revenue growth in prospect and useful cash flow. Concentration on new finance packages appears to have arrested the underlying decline of rental in developed markets.

So what are the parts worth? That depends on the methodology used and the extent to which bid premiums are factored into the final valuations, but however the cake is sliced the deal leaves the break-ups of Hanson and British Gas in the shade from the point of view of creating shareholder value.

One method of putting a price tag on EMI involves attaching a multiple to the company's sales, which reached pounds 2.2bn in the year to March 1995 and could be pounds 370m higher in the current year. A consensus figure of 2.25 times sales, which is about what PolyGram paid for Motown in 1993, generates a value of between pounds 5.8bn and pounds 6bn for EMI.

That could be too high, because there is less scope with this deal for wringing extra efficiencies from EMI's already tight operation. It is also complicated by EMI's 55 per cent stake in its Japanese off-shoot, which the crude sales measure appears to overvalue.

A more sophisticated model attaches a sales measure to EMI's recorded music side, while valuing the publishing side on a multiple of its share of royalties. Using that methodology, one broker comes up with a range of between pounds 5bn and pounds 5.7bn.

Valuing Thorn and HMV is simpler. The rentals business is expected to trade on something approaching a market rating after demerger, suggesting a value of about pounds 1.6bn. HMV, the smallest division, is probably worth another pounds 250m to pounds 350m.

In total then, pounds 8bn seems a reasonable price tag for the whole group, which compares with Thorn EMI's market capitalisation at yesterday's close of pounds 7.2bn. Given the remaining uncertainty there is little incentive for anyone who has missed the fun so far to jump aboard. But long-standing shareholders should hold on to squeeze what value remains locked up in the combined group.

The risk for shareholders is that any hitch will send the shares tumbling. Profit forecasts for the full year of just over pounds 500m put them on a prospective price/earnings multiple of about 23, which only falls to 20 in the year to March 1997. That is high but, even if a yield of 3 per cent provides little support, not astronomically so for this type of business. Hold for next week's developments.

Suggested Topics
Start your day with The Independent, sign up for daily news emails
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Guru Careers: Pricing Analyst

£30 - 35k: Guru Careers: We are seeking a Pricing Analyst to join a leading e-...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45K YR1: SThree: At SThree, we like to be dif...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + competitive: SThree: Did you know? SThree is a mul...

Guru Careers: C# Project Team Lead

£55 - 65k (DOE): Guru Careers: A unique opportunity for a permanent C# Develop...

Day In a Page

Blundering Tony Blair quits as Middle East peace envoy – only Israel will miss him

Blundering Blair quits as Middle East peace envoy – only Israel will miss him

For Arabs – and for Britons who lost their loved ones in his shambolic war in Iraq – his appointment was an insult, says Robert Fisk
Fifa corruption arrests: All hail the Feds for riding to football's rescue

Fifa corruption arrests

All hail the Feds for riding to football's rescue, says Ian Herbert
Isis in Syria: The Kurdish enclave still resisting the tyranny of President Assad and militant fighters

The Kurdish enclave still resisting the tyranny of Assad and Isis

In Syrian Kurdish cantons along the Turkish border, the progressive aims of the 2011 uprising are being enacted despite the war. Patrick Cockburn returns to Amuda
How I survived Cambodia's Killing Fields: Acclaimed surgeon SreyRam Kuy celebrates her mother's determination to escape the US

How I survived Cambodia's Killing Fields

Acclaimed surgeon SreyRam Kuy celebrates her mother's determination to escape to the US
Stephen Mangan interview: From posh buffoon to pregnant dad, the actor has quite a range

How Stephen Mangan got his range

Posh buffoon, hapless writer, pregnant dad - Mangan is certainly a versatile actor
The ZX Spectrum has been crowd-funded back into play - with some 21st-century tweaks

The ZX Spectrum is back

The ZX Spectrum was the original - and for some players, still the best. David Crookes meets the fans who've kept the games' flames lit
Grace of Monaco film panned: even the screenwriter pours scorn on biopic starring Nicole Kidman

Even the screenwriter pours scorn on Grace of Monaco biopic

The critics had a field day after last year's premiere, but the savaging goes on
Menstrual Hygiene Day: The strange ideas people used to believe about periods

Menstrual Hygiene Day: The strange ideas people once had about periods

If one was missed, vomiting blood was seen as a viable alternative
The best work perks: From free travel cards to making dreams come true (really)

The quirks of work perks

From free travel cards to making dreams come true (really)
Is bridge the latest twee pastime to get hip?

Is bridge becoming hip?

The number of young players has trebled in the past year. Gillian Orr discovers if this old game has new tricks
Long author-lists on research papers are threatening the academic work system

The rise of 'hyperauthorship'

Now that academic papers are written by thousands (yes, thousands) of contributors, it's getting hard to tell workers from shirkers
The rise of Lego Clubs: How toys are helping children struggling with social interaction to build better relationships

The rise of Lego Clubs

How toys are helping children struggling with social interaction to build better relationships
5 best running glasses

On your marks: 5 best running glasses

Whether you’re pounding pavements, parks or hill passes, keep your eyes protected in all weathers
Joe Root: 'Ben Stokes gives everything – he’s rubbing off on us all'

'Ben Stokes gives everything – he’s rubbing off on us all'

Joe Root says the England dressing room is a happy place again – and Stokes is the catalyst
Raif Badawi: Wife pleads for fresh EU help as Saudi blogger's health worsens

Please save my husband

As the health of blogger Raif Badawi worsens in prison, his wife urges EU governments to put pressure on the Saudi Arabian royal family to allow her husband to join his family in Canada