Hanson Looks For A Hat Trickby
The Batman and Robin of British business, James Hanson and Gordon White, are relaxing before taking the stage for Hanson PLC's 30th annual meeting. For the first time, the shareholder conference is being videotaped, and a makeup artist arrives. Hanson, chairman of the London-based empire that bears his name, quietly submits. The waiting White, Hanson's No.2, seems horrified. "Good Lord," he mutters. "Is this really necessary?"
Apparently, it is. The British conglomerate, which sells everything from coal to whirlpool baths, is anxious to spruce up its image. No longer the high-flying act it was in the 1980s, when earnings typically grew by 20% a year, the company reported its first profit decline in 30 years: a 33% aftertax drop, to $1.5 billion, in the fiscal year ended Sept. 30, 1993. Add to that a change in leadership now that veteran Hanson executives Derek C. Bonham and David H. Clarke have all but replaced Lords Hanson and White, 72 and 70, and it's clear why investors are jittery.
Hanson's stock has underperformed the market for the past three years, and it continues to be a laggard. The London share price has dropped 3% since Dec. 1, to around 4, while British stocks overall have climbed 5%. That's hardly catastrophic. But it's an outright embarrassment for Hanson, formerly a star on the London Stock Exchange.
Now, Hanson is scrambling to regain its prominence as a blue chip. The videotaped meeting is part of a broader strategy to attract investors. Press briefings and analysts' meetings are now common at an organization that has eschewed such practices. Hanson is also shedding assets to pay down its $6 billion in long-term debt. What's more, Hanson, which was built through dozens of acquisitions, seems to be plotting another crowd-pleasing deal. Earlier this year, the conglomerate considered and rejected acquiring Borden Inc. Now, Wall Street is speculating that Hanson is eyeing RJR Nabisco Inc.'s tobacco interests. Hanson and RJR declined to comment.
If dealmaking doesn't excite investors, some analysts and shareholders say Hanson may embark on a more radical plan: splitting into separate British and U.S. companies. That would create smaller, focused operations, advocates argue, as well as a U.S. company that would have an easier time attracting U.S. investors. Only 25% of Hanson's shareholders are American, even though half of its profits and revenues come from U.S. operations (table). Lord Hanson says a divorce isn't in the cards. Lord White is less definitive. "Any way of improving shareholder value is seriously looked at," he says. "It's something we've just got to keep under
SLOWER GROWTH. Whatever happens, Hanson may never recapture its glory days. In the 1980s, it prospered by buying poorly managed companies in mature markets, stripping out unwanted assets, and operating the rest for their cash flow. Now Hanson is so big that it takes a huge acquisition, one that generates $1 billion to $3 billion in sales, to have much impact on earnings. And vulnerable targets are harder to find with so many corporations downsizing and improving efficiency.
With Lords Hanson and White spending most of their time in semiretirement in California, it will be up to the new management team to adapt to the leaner environment. Bonham, CEO and heir apparent to Lord Hanson, is now running the day-to-day operations in London. Clarke, 52 and a White prot g , is in charge of U.S. operations. They're not exactly newcomers. Each has worked for Hanson for over 20 years. Bonham joined as a young accountant and rose through the ranks as a financial whiz kid. Clarke, an American, joined Hanson when it bought his family's U.S. seafood-processing business in 1973.
Both believe Hanson still has lots of room to grow, though at a slower rate. "The reality is we're living in a low-growth, low-inflation climate. To suggest you can continue to grow by 20% is out of line," says Bonham. He and Clarke are telling shareholders that they see growth at twice the rate of inflation for the next decade. Britain's 1994 inflation rate is expected to be 3%.
To achieve their goal, the pair are trying to slim down and focus Hanson's sprawling empire. In the past few months, they've sold 15 companies for a total of $800 million. They include the U.S. homebuilding operations of Hanson's Beazer USA Inc. unit, an office-supply business in New Jersey, and an oil-services company in Oklahoma. This year, Hanson plans selling Beazer's British homebuilding unit. And there is speculation that Hanson might shed pieces of its U.S. consumer-products division. Asset sales will chip about $1.5 billion off the $6 billion net debt mountain.
Hanson isn't out of the acquisition game, though. This time, Bonham and Clarke want to add to Hanson's core businesses of coal, timber, chemicals, building products, and tobacco. Last September, Hanson acquired Cincinnati-based Quantum Chemical Corp. for $3.2 billion. And the company is still shopping. "We've made a long-term decision to acquire something," Lord White reveals. Although he won't say what it is, some analysts believe RJR's tobacco business is a likely target. RJR is widely expected to split itself into food and tobacco halves, and its cigarette business would fit neatly into the Hanson empire, whose biggest company is Imperial Tobacco. And Hanson wants to expand its tobacco business globally. Still, RJR would be an uncharacteristically pricey deal for Hanson.
HIDDEN ASSETS. Hanson faces a tough haul. Analyst Mark Cusack of Barclays de Zoete Wedd Inc. says Hanson's earnings could remain flat this year at about $1.5 billion as its revenues grow 20%, to $17.5 billion. Huge debt payments are to blame for restraining profits. Cusack also projects negative cash flow for Hanson in 1994. Those prospects are fueling speculation that Hanson may have to take a dramatic step, such as a breakup, to draw investors.
While a demerger, as it's being described in investment circles, wouldn't solve all of Hanson's problems, it could make sense. One of the reasons investors are shying away from Hanson is its sheer size and diversity. With over 30 separate organizations worldwide, it's "harder to understand than your average company," says Dick Unruh, a fund manager with Delaware Management, one of Hanson's biggest U.S. shareholders. And some analysts argue that valuable assets are obscured by Hanson's bulk. Jacuzzi Inc., the whirlpool-bath maker that Hanson bought in 1987, is a hidden gem, says one analyst. If the Walnut Creek (Calif.) company had its own stock, he says it would trade at a premium of 20 times earnings. Hanson's stock trades at a price-earnings multiple of 16.
Moreover, Hanson's U.S. companies are growing faster than their British counterparts. U.S. operations will account for 60% of Hanson's profits by 1995, compared with 50% today, says analyst H. Lloyd Kanev of Smith Barney Shearson Inc. A U.S.-based Hanson would eliminate currency uncertainties for U.S. investors. And it would be required to follow U.S. accounting principles, making it easier for potential investors to evaluate its results. Under British securities laws, Hanson writes off goodwill immediately after an acquisition instead of amortizing it as is required in the U.S. That practice tends to make the company's long-term performance look better.
So is a split really in the cards? Some board members support such a move, says one company insider. But a dismantling would rob Hanson's British unit of generous U.S. depletion allowances. And Hanson's current size also gives it access to capital and a credit rating a smaller company couldn't match. "So far, we've not been able to make the demerger calculation stand up," Lord Hanson says. But like Lord White, Clarke--who would presumably end up running an independent U.S. company--is open-minded. "Will it happen eventually? It could," he says. "I don't want to say it won't." After 47 acquisitions and 152 divestitures over the past 30 years, Hanson may yet have more surprises in store for investors.