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
Arts and Entertainment
Dakota Johnson as Anastasia Steele in Fifty Shades of Grey
film
Sport
Bafetibis Gomis of Swansea City is stretchered off at White Hart Lane
football
News
Jerry Seinfeld Comedians in Cars Getting Coffee
peopleSitcom star urges men to be more supportive of women than ever
Life and Style
Living for the moment: Julianne Moore playing Alzheimer’s sufferer Alice
health
News
Jay Z
businessJay-Z's bid for Spotify rival could be blocked
Sport
footballLouis van Gaal is watching a different Manchester United and Wenger can still spring a surprise
News
The spider makes its break for freedom
VIDEO
ebooks
ebooksA special investigation by Andy McSmith
Voices
A propaganda video shows Isis forces near Tikrit
voicesAdam Walker: The Koran has violent passages, but it also has others that explicitly tells us how to interpret them
Arts and Entertainment
books
News
people
Sport
Ashley Young celebrates the winner for Manchester United against Newcastle
footballNewcastle v United player ratings
Life and Style
love + sex
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

Ashdown Group: Graduate Application Support Analyst

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Reach Volunteering: External Finance Trustee Needed!

Voluntary post, reasonable expenses reimbursed: Reach Volunteering: Would you ...

Christine McCleave: FP&A Analyst

£36,000 - £40,000: Christine McCleave: Are you looking for a new opportunity a...

Recruitment Genius: Sales Executive - OTE £40,000

£15000 - £18000 per annum: Recruitment Genius: This is a great opportunity for...

Day In a Page

War with Isis: Iraq's government fights to win back Tikrit from militants - but then what?

Baghdad fights to win back Tikrit from Isis – but then what?

Patrick Cockburn reports from Kirkuk on a conflict which sectarianism has made intractable
Living with Alzheimer's: What is it really like to be diagnosed with early-onset dementia?

What is it like to live with Alzheimer's?

Depicting early-onset Alzheimer's, the film 'Still Alice' had a profound effect on Joy Watson, who lives with the illness. She tells Kate Hilpern how she's coped with the diagnosis
The Internet of Things: Meet the British salesman who gave real-world items a virtual life

Setting in motion the Internet of Things

British salesman Kevin Ashton gave real-world items a virtual life
Election 2015: Latest polling reveals Tories and Labour on course to win the same number of seats - with the SNP holding the balance of power

Election 2015: A dead heat between Mr Bean and Dick Dastardly!

Lord Ashcroft reveals latest polling – and which character voters associate with each leader
Audiences queue up for 'true stories told live' as cult competition The Moth goes global

Cult competition The Moth goes global

The non-profit 'slam storytelling' competition was founded in 1997 by the novelist George Dawes Green and has seen Malcolm Gladwell, Salman Rushdie and Molly Ringwald all take their turn at the mic
Pakistani women come out fighting: A hard-hitting play focuses on female Muslim boxers

Pakistani women come out fighting

Hard-hitting new play 'No Guts, No Heart, No Glory' focuses on female Muslim boxers
Leonora Carrington transcended her stolid background to become an avant garde star

Surreal deal: Leonora Carrington

The artist transcended her stolid background to become an avant garde star
LGBT History Month: Pupils discuss topics from Sappho to same-sex marriage

Education: LGBT History Month

Pupils have been discussing topics from Sappho to same-sex marriage
11 best gel eyeliners

Go bold this season: 11 best gel eyeliners

Use an ink pot eyeliner to go bold on the eyes with this season's feline flicked winged liner
Cricket World Cup 2015: Tournament runs riot to make the event more hit than miss...

Cricket World Cup runs riot to make the event more hit than miss...

The tournament has reached its halfway mark and scores of 300 and amazing catches abound. One thing never changes, though – everyone loves beating England
Katarina Johnson-Thompson: Heptathlete ready to jump at first major title

Katarina Johnson-Thompson: Ready to jump at first major title

After her 2014 was ruined by injury, 21-year-old Briton is leading pentathlete going into this week’s European Indoors. Now she intends to turn form into gold
Syrian conflict is the world's first 'climate change war', say scientists, but it won't be the last one

Climate change key in Syrian conflict

And it will trigger more war in future
How I outwitted the Gestapo

How I outwitted the Gestapo

My life as a Jew in wartime Berlin
The nation's favourite animal revealed

The nation's favourite animal revealed

Women like cuddly creatures whilst men like creepy-crawlies
Is this the way to get young people to vote?

Getting young people to vote

From #VOTESELFISH to Bite the Ballot