Thorn in bid spotlight after chairman refuses CBI role

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The Independent Online

The decision by Thorn EMI chairman Sir Colin Southgate not to take up the presidency of the Confederation of British Industry has again put the music to consumer rental group in the bid spotlight. Sir Colin cited for his decision pressure of work in preparing for the planned break-up of the business.

On the face of it, demerging the various parts of Thorn EMI should not present the chairman with too onerous a task. There is precious little business connection binding together recording and publishing stars like Frank Sinatra and the pop group Smashing Pumpkins, with rented furniture and televisions.

Where the headaches do lie is in unscrambling the legal details of 22 holding companies operating in 40 countries and a potentially hefty tax bill, which is likely to have come down from last year's estimates of pounds 150m but could still be substantial.

The prize for shareholders is likely to be worth both the extra tax and the hard work to be put in by Sir Colin and his fellow directors if they do decide to go with a demerger "early next year". Since the beginning of the year, the share price has outperformed the rest of the stock market by 28 per cent as break-up bid speculation has gathered pace. At pounds 15.54, up 5p yesterday, the shares stand just below their all-time high. Yet many analysts believe that is just the starting point for the sort of value that could be unlocked by the separation of the parts of the group.

The jewel in Thorn EMI's crown is undoubtedly the EMI music business, now probably the third-largest in the world behind Time Warner of the US and PolyGram, controlled by the Dutch electronics giant Philips. The deal which catapaulted the group into the top ranks of the music industry was the pounds 510m acquisition of Virgin Music in 1992, bringing together blockbuster groups like the Rolling Stones, Genesis and UB40 with the likes of Tina Turner and the Pet Shop Boys.

Virgin rapidly proved its worth, chipping in record profits of pounds 90m in 1993-94, the last year it was reported separately. But EMI also possesses a massive cash cow in the shape of its ownership of copyrights to well over 800,000 music titles.

Any break-up of the group could set off a massive auction for the EMI business, given its position as the only one of the big five groups not owned or controlled by a big group. But the Thorn rental business, which has tended to be overshadowed by the music side, could also prove attractive to bidders. Its rather dowdy image is being transformed by a move towards "rent to buy", opening up a relatively painless way for the less well- off to own sought-after consumer durables.

Based on traditional multiples of sale, cash flow and earnings, Paul Slattery at brokers Kleinwort Benson puts a value on pounds 5bn on EMI alone, with another pounds 2bn or so for Thorn and perhaps pounds 350m for the HMV and Dillons record and bookshop chains. Together, that adds up to pounds 17 a share for the group as currently constituted, but in a bidding war "it would not be stupid if we saw an end price of pounds 23", he says.

The only fly in the ointment is whether EMI's recording artists would be keen to sign up to likely bidders, which include Viacom, the third- largest music retailer in the US, Steven Spielberg's DreamWorks SKG, Walt Disney and News International. Many recording stars have contracts that allow them to walk away on a change of ownership, which could substantially reduce the value of EMI unless some notoriously fragile egos are handled carefully.

But Sir Colin and Jim Fifield, head of EMI, have a personal interest in ensuring that any such moves do not get in the way of securing the best possible price in any auction for the group. At pounds 20 a share, Sir Colin would net close to pounds 6.5m from his share options, while Mr Fifield could pocket pounds 3.8m on top of total emoluments last year of pounds 7.53m.

In certain circumstances he could also pick up a further 800,000 shares in six years time, worth pounds 16m at pounds 20 a share.

Comment, page 23


Turnover pounds Pre-tax pounds EPS Dividend

Airflow Streamlines (I) 51.3m (43.5m) 2.96m (0.92m) 22.91p (6.87p) 3p (2p)

Carlisle Group (I) 2.61m (2.87m) -3.5m (1.0m) -2.2p (1.2p) nil (0.25p)

Chesterfield Prop (I) 17.8m (16.5m) 3.72m (3.12m) 8.78p (11.9p) 4.4p (4.4p)

Ferguson Interntnl (I) 104.4m (80.5m) 5.6m (6.0m) 11.7p (11.9p) 4.5p (4.5p)

Albert Fisher (F) 1.65bn (1.42bn) 31.1m (34.8m) 2.9p (3.34p) 3.75p (3.71p)

Formscan (F) 5.0m (2.74m) 0.90m (0.48m) 7.8p (4p) 2p (nil)

MJ Gleeson (F) 192m (174m) 8.45m (8.90m) 52.66p (58.79p) 15p (14.16p)

Premium Underwriting (F) - (-) 0.01m (-0.06m) 0.1p (-0.48p) nil (nil)

Ramco Energy (I) 3.61m (2.40m) 0.61m (0.08m) 2.16p (0.33p) nil (nil)

Wescol (F) 24.3m (18.3m) 0.79m (0.26m) 2p (1p) 0.75p (0.25p)

(Q) - Quarterly (F) - Final (I) - Interim