View from City Road: ICI demerger not an end in itself

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The Independent Online
'IF THE shape of the two companies two years after demerger is the same as at inception, I believe their managements will have failed.' That comment, by Ronnie Hampel, chief operating officer of Imperial Chemical Industries, is the key to its demerger proposals. ICI is embarking on the most radical restructuring of its 66-year history. But it will only be judged a success if it is the catalyst for yet more radical action within the two demerged businesses.

The 76p jump in ICI's shares to pounds 11.71 yesterday puts it on a forward multiple of about 17 times earnings. Ciba-Geigy - which, like ICI's Bioscience arm has significant agrochemical interests - trades on a multiple of about 14, while BASF and Solvay, whose pharmaceutical businesses are small, stand at about 12. Until the terms of the ICI split are known it is difficult to put any meaningful numbers on the two halves, but investors expect great benefits.

Past experience of demergers suggests their optimism is justified. Sir Christopher Hogg, who presided over the Courtaulds split, always saw it as a precursor to more significant change. While Vodafone's shares have moved in line with the market since it was demerged last September those of its parent, Racal Electronics, have outperformed by 80 per cent.

ICI's demerger may take longer to prove itself, but the ingredients are there. ICI Bio appears to have the most potential. If its promise of blockbuster drugs in the development pipeline is fulfilled, it could start to enjoy the 18-plus multiples enjoyed by some of its rivals. That would make expansion by acquisition easier, helping to fulfil its ambition of breaking into the international top 10. And it will be able to use its strong cash generation to boost research and marketing, rather than watching it fund the cyclical businesses during recession, as now.

If Mr Hampel - chief executive-elect of the industrial chemical and paints side - is as good as his word, however, that business could also surprise. Investment is at present being rationed in favour of pharmaceuticals, which has already forced the paints division to forego a major acquisition. Once recovery is under way it will be free to spend any money it generates as it likes.

ICI is to be congratulated on getting this far. It will now have to demonstrate that its entrepreneurial spirit will extend beyond the demerger process. But, underpinned by the prospect that bidders will find the two new businesses more digestible, the shares are likely to remain buoyant.

(Photograph omitted)