View from City Road: The logic behind Hanson's Quantum leap

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The Independent Online
'Hanson's objective for the Nineties is to build up its major businesses, while being prepared to make major acquisitions when the opportunity presents itself. Quantum fits this perfectly.'

Lord Hanson is still keen to have his cake and eat it. For all its talk about organic expansion Hanson still cannot resist a potential bargain.

Since Hanson has always been best at this sort of thing - buying cheaply while stripping out costs and cash - the stock market is bound to view the dollars 3.2bn move on Quantum in a favourable light. After all, Hanson is valuing Quantum's equity at less than twice peak 1988 net income.

In terms of share price performance Hanson has been falling increasingly out of favour of late. It has become fashionable to describe formerly acquisitive conglomerates as beached whales that cannot survive without the plankton of deals. Perhaps Hanson, after the abortive ICI detour, is proving that there is life in the company yet.

Yet the Quantum deal is not entirely an old-style, Eighties Hanson exercise as there are no plans to sell off chunks of the business or slash employment. The incumbent Quantum management has already carried out a restructuring of its polyethylene plant at La Porte, Texas, which will make a significant difference to operating profits this year. Quantum's dollars 40m-a-year corporate headquarters in New York has also been closed.

The US company got itself into a terrible position in 1989, fending off a phantom corporate raider with a huge special dividend to shareholders that wrecked its balance sheet. As with Beazer, Hanson could halve at a stroke the dollars 262m interest cost of Quantum's dollars 2.5bn debt burden to supplement the current cost reduction programme.

The lack of strong industrial logic in the deal does, however, have the authentic Hanson touch. Quantum may be a chemicals company but its interests in plastics, petrochemicals and propane gas distribution have no overlap with the activities of SCM, Hanson's US chemicals company.

Nevertheless, Hanson will do well out of Quantum, which made operating profits of dollars 760m at the 1988 peak against just dollars 61m in 1992. Polyethylene capacity has been cut out and prices are on the move.

Every 1 cent move in price adds dollars 35m to Quantum's operating income and there has been a recent 3 cent increase. This is a pure bonus for Hanson since cost reduction and interest-saving by themselves will surely allow Quantum to be at least self-financing in Hanson's next financial year. The canny deal is not yet dead.

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