Doing the splits throws spotlight on Hanson weakness
Indemnity could be first of the many
Biotechnology - a game for grown-ups
EVEN for Hanson, £900m would be a pretty sizeable takeover, but this week that much has been wiped off the value of the company following the announcement that the conglomerate intends to quarter itself. The City is telling Hanson that the whole really is greater than the sum of the parts.
Either Lord Hanson or the City has got it wrong. The demerger was a response to the slide in the share price from 300p in 1994 to below 200p last month. Of the many possible reasons for the fall - that the company has gone ex-growth, for instance, or that the 74-year-old chairman has lost his flair for takeovers - Lord Hanson apparently blames the investors rather than the company. When big was beautiful and takeovers were in fashion, Hanson was the toast of the City. But fashions change and conglomerates are out - look how Forte used it as a term of abuse about Granada. Today's buzz-words are "focus" and "core businesses" - but if that's what the City demands, Lord Hanson is evidently prepared to do the splits to please.
What he seems to have done, however, is to draw the spotlights on to the company, highlighting its weaknesses. Now that the analysts have picked over the Hanson businesses in detail they fear that they do not even add up to 200p a share. While the word "Hanson" had lost most of the magic that it once automically sprinkled on to the ordinary businesses which the company operates, there was still just sufficient left to allow the market to believe that Lord Hanson could pull off just one more deal like the old days. The decision to demerge and the promise to retire next year means that that hope has all but gone.
Without the magic, Hanson is simply a collection of chemical, building material and other businesses in a holding company, that carries £4 1/2 billion of debt. Perhaps Lord Hanson does not see it that way: maybe he has correctly realised that a £10 billion company is too unwieldy a dinosaur to move quickly and too easy a target for an incoming Labour government.
Perhaps he and his advisers can see a way of leaving the four dismembered parts of Hanson with the same low tax rate that the parent enjoys. Perhaps he is banking on predators picking off the parts and has pencilled in a bid premium.
Or perhaps he has no wish to see anyone else running the business that he built and wants to divide the estate between his proteges, including son Robert. Certainly the divisional executives offered the chance to run their own quoted businesses would not object to a split.
But on the basis of the share price's immediate reaction, Lord Hanson should be wondering whether it would have been better to sell, say, the Imperial Tobacco business and repay most of that debt, leaving a cleaner but smaller company with enough left over for the current fashion, a special dividend.
It is by no means impossible that the announcement will flush out an offer - and it would be by no means silly to accept.
It is easy to think of Trade Indemnity as a credit guarantee company rather than the insurance company that it really is, but by the end of the year its takeover by the French could be remembered as the start of the long-awaited rationalisation of the insurance industry.
Too many companies have been chasing too little business, but while the quality of that business as well as its price was low, there was no incentive to mop up the sort of company that is vulnerable to a takeover, even to benefit from the savings in overheads. Trade Indemnity is a special case.
It is effectively a consortium insurer owned by Guardian Royal Exchange, Commercial Union, Royal and their rivals, with only a quarter of the shares in the public's hands: each benefits little from its ownership, but SFAC is already in the credit insurance business and can gain real synergies, with almost no geographical overlap.
But having facilitied Trade Indemnity's takeover, the insurance companies that are selling should consider their own future. Those that do not plan to gobble up rivals at home or abroad are likely to be eaten up themselves by rivals or by other financial services groups such as banks. It will be surprising if there are not more amalgamations during 1996.
HERE we go again. A warning from a biotechnology company knocks the shares back 24pc - but the City shrugs its shoulders and says that even after Celltech's fall, the price is still twice the flotation level. So, after an early wobble, the rest of the biotechnology stocks escaped almost unscathed yesterday.
This generous reaction to what Celltech calls a "small to moderate earthquake" looks odd. This is a biotechnology company that has taken the safety-first approach of signing partnerships with major drug companies: if it can suffer earthquakes, the risks in other companies' development programmes should be transparent.
There is probably not a fund manager in the land to whom the CDP 840 drug means much. But they know the name Merck and if the American drugs giant reckoned that Celltech's CDP 840 was a winner, it was probably time to buy the shares. Such simplistic reasoning should not be sneezed at: in the absence of earnings or assets or any of the other conventional ways of valuing an investment, the fund managers are in the dark. All they can do is guess at the chances of a product coming to market, the size of its potential sales and the possible profit margin.
But what do you subtract for the chance element? In the case of British Biotech's anti-cancer treatment marimastet, one broker is said to be telling its clients that the probability of it getting to market is 95pc. Over at NatWest Securites, they reckon there is a 45pc chance of outright failure and only a 5pc chance of runaway success.
The scope for being wrong is enormous, but the most that can be lost is 100pc of the investment - the gain from a biotech can be 1000pc or more. If you doubt the latter, the example of British Biotech is already at hand.
Its shares have quadrupled in the last six months but there again, the Lottery produces a winner most weeks: the problem is merely knowing the number in advance.
The moral is that the biotechnology sector is being driven by investment fashion - and fashions can turn rapidly. The biotechnology game is strictly for grown-ups who do not cry when they lose all.
