View From City Road: Sir Colin fails to convince

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The Independent Online
It is a little rich for Sir Colin Southgate, chairman of Thorn EMI, to dismiss speculation of a demerger of his music-to-TV-rentals group as all down to summer boredom in the City. He did, after all, start the ball rolling himself in May.

Yesterday, he was back-pedalling furiously with a list of objections to demerger so long that it is difficult to believe companies like Racal, ICI and Courtaulds could ever have contemplated the idea, let alone found it an attractive thing to have done. None, however, was that convincing.

Certainly the claim that it might cost Thorn more than the pounds 75m paid by ICI seems hard to believe. Beyond tax savings and a centralised treasury function there seem few other clear-cut benefits in maintaining the status quo. No synergies exist between renting out washing machines and marketing the latest Beastie Boys album. The cash flows are relatively evenly balanced, so even that tired old argument in favour of maintaining unrelated businesses under one roof - that they are counter-cyclical - falls away.

But perhaps one should not be too hard on Sir Colin. Judging by yesterday's results he is beginning to deliver on the promises made at the time of acquiring Virgin's music interests - financed by a huge rights issue. There is also clearly work still to be done in making rental an attractive stand- alone proposition. Renting furniture to those who cannot get credit to buy it, or adding everything from phones to fridges to its rental list, are interesting initiatives, but there must still be a question mark over the long-term growth of this market.

From Sir Colin's own point of view, the very attractiveness of the other arm of his business, EMI records, acts as a powerful disincentive to demerger. Stripped of rental, EMI would be easy prey for the multi- media conglomerates scouring the world for entertainment product. Apart from PolyGram, which is protected by a larger parent, there are no other big stand-alone record companies left to buy.

Sir Colin promises to reconsider demerger in three years' time. By then he may well have achieved his ambition of bolstering EMI with a more appropriate add-on, such as a large publishing company. Demerger of rental would then seem a much more acceptable proposition.

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