International -- Int'l Business: FRANCE
CHARGEURS: THE SPIN-OFF HEARD `ROUND THE CONTINENT (int'l edition)
Chargeurs' breakup may inspire many imitators
To his peers in French boardrooms, Jerome Seydoux may seem a bit of a pest. With great fanfare on June 24, Seydoux split the conglomerate he has run, Chargeurs, into two new publicly traded companies in order to boost share value. One of them, Pathe, has film and TV holdings. The other, Chargeurs International, produces textiles. This big demerger--France's first, and a rarity on the Continent--is proving to be a boon to investors.
After three days of separate trading, the combined market value of the new companies had climbed to $2.15 billion. That's 22% more than Chargeurs' market value last February, when Seydoux announced his plan to exchange one share in each of the new companies for every share of Chargeurs. Now many investors are asking why other companies with ill-matched businesses don't do the same.
HIDDEN VALUE. Good question. Analysts have long prodded such European companies as Germany's Bayer to split its chemical and drug businesses, and France's Matra Hachette to separate missiles from magazines. Critics claim that resistant managers have been putting personal power over shareholder gain. Now the Chargeurs breakup may build new impetus for demergers, or spin-offs as Wall Street generally calls them. That is largely because the markets prefer "pure plays" to mixed bets.
"There will be more demergers in Europe, I'm sure of it," says Jean-Claude Haas, general partner of investment banker Lazard Freres, who engineered the Chargeurs deal. Spin-offs to shareholders, says Haas, are often a far easier way to dispose of noncore assets than finding buyers for them.
Seydoux, who will run Pathe, has gained another benefit: He now has stock in a "pure" media company with a current market value of $1.8 billion to pay for acquisitions he hopes to make. Although Pathe lost $98 million last year on revenues of $210 million, largely because of depreciation and write-offs on properties such as movie theaters, it has big earnings potential from the spread of digital-TV broadcasts in Europe. One thing Seydoux might bid for is filmmaker MGM, at a probable cost of at least $1.5 billion. Pathe's large film library would be complemented by that of MGM, now owned by the French government as caretaker for Credit Lyonnais, the troubled state-owned bank.
Spin-offs such as Seydoux' are old hat in the U.S. The British are also finding they can be a neat way to unlock hidden value. The 1993 split-up of chemical giant ICI and drugmaker Zeneca has paid off handsomely. Hanson PLC will start spinning off energy, tobacco, construction, and chemical units in October. In August, Thorn EMI PLC plans to split its music and household-goods rental businesses.
As usual, the Continent lags in such Anglo-Saxon maneuvers. In France, there's a good reason. Until now, stockholders who got shares had to pay tax on unrealized capital gains. But Seydoux' Lazard advisers persuaded the government to change the rules to encourage capital mobility. On a case-by-case basis, regulators will now allow tax-deferred demergers that produce two viable companies. In Chargeurs' case, Seydoux had to promise he and his family would keep their 27% stake in both new companies for five years to assure stability.
IN A TROUGH. Now, Seydoux must prove that the demerger will focus management and beef up both companies. Chargeurs International, which lost $13 million last year on sales of $1.7 billion, is in a cyclical trough. But Pathe has valuable holdings, such as 17% of Britain's British Sky Broadcasting pay-TV company and 20% of French digital-TV operator Canalsatellite.
Will other Continental companies follow suit? French chemical maker Rhone-Poulenc says it's "studying" the spin-off of its drug unit--news that caused the parent's shares to surge. Analysts say Germany's BASF Group and Bayer should do likewise. If Seydoux' breakup pays off, such companies may face a shareholder urge to demerge that will get harder to resist.By Stewart Toy in Paris, with Heidi Dawley in London and Karen Lowry Miller in Bonn