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Hanson PLC (B): Breaking It Up

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Hanson PLC (B): Breaking It Up

Hanson PLC (B): Breaking It Up
Copyright © 2007 by Charles W. L. Hill. This case was prepared by Charles W. L. Hill, the University of Washington, as the basis for
class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Reprinted by permission
of Charles W. L. Hill. All rights reserved. For the most recent fi nancial results of the company discussed in this case, go to http://fi nance
.yahoo.com, input the company’s stock symbol, and download the latest company report from its homepage.
25
Introduction
During the 1970s and 1980s, Hanson PLC put
together one of the most impressive growth stories
of any industrial company in the world. Under the
leadership of James Hanson and Gordon White,
Hanson PLC made its name by acquiring poorly run
conglomerate companies in both Britain and America at prices that were often below their book value.
In quick order Hanson would then change the senior
management of the acquired company, sell many of
the company’s assets to other enterprises, typically
for a considerable profi t, and impose tight fi nancial
controls on what remained in order to maximize
profi tability and cash fl ow. The locus classicus was
Hanson’s 1986 acquisition of the Imperial Group, a
diversifi ed British tobacco, brewing, and food conglomerate, where some £2.4 billion of the £2.5 billion
purchase price was recouped from asset disposals,
leaving Hanson with the cash-generating tobacco
business intact. The results of this strategy were
nothing short of stunning. Between 1973 and 1991,
Hanson put together twenty-nine years of uninterrupted profi t growth to build a diversifi ed company
with revenues of £7.69 billion ($12.3 billion) and
operating income of £1.33 billion ($2.13 billion).
Hanson’s stock price appreciation was also spectacular, increasing more than a hundredfold between
1973 and 1991.
However, 1991 may have been the high-water
mark of Hanson’s growth story. In 1990 Hanson
took a 2.9 percent stake in the British chemical
and pharmaceutical company, Imperial Chemical
Industries (ICI). Many saw this as a prelude to yet
another Hanson acquisition, but ICI was not about
to be taken over. After a bitter public relations
battle during which ICI characterized Hanson’s
management as having a short-term orientation
and criticized them for failure to add value to the
companies they acquired, Hanson sold its stake in
May 1991. While the stake was sold for a profi t of
£45 million ($70 million), the public relations battle damaged Hanson’s image. A year later Hanson
was outbid for a British food company, RHM, by
a smaller conglomerate run by a former Hanson
manager. These two failures raised questions as to
whether Hanson’s two founders, who were now
both in their seventies, were still up to the rough
game of hostile takeovers. To compound matters
further, for the year ending in September 1993, with
many of its cyclical businesses suffering from the
effects of a recession in both Britain and America,
Hanson reported a 33 percent decline in after-tax
profi ts to $1.5 billion, the fi rst such decline in its
history. Refl ecting these problems, Hanson’s stock
price peaked in early 1991 and remained fl at over
the next few years, while the equity markets in
Britain and America boomed.
C356
48567_39_case25_p356-361.indd C356 9/3/09 3:28:11 AM
Case 25 Hanson PLC (B): Breaking It Up C357
A New Direction?
In 1992 the leadership mantle at Hanson started
to pass from the company’s charismatic founders,
the now ennobled (Lord) Hanson and White, to
Derek Bonham and David Clarke, who were then
forty-eight and fi fty, respectively. Bonham took over
as CEO with primary responsibilities for Hanson’s
British-based operations, while Clarke succeeded
White as president of Hanson’s substantial American
operation. Lord Hanson remained on in the chairman’s role, while White continued as the company’s
senior person in charge of mergers and acquisitions.
(White died in 1995.)
Although both long-time Hanson employees,
Bonham and Clarke clearly lacked the predatory
thirst that had driven Hanson and White. Early in his
tenure Bonham admitted that Hanson had become
“too much of a mishmash” and stated that he hoped
to correct that by focusing management’s attention
on improving the performance of its core businesses
in building materials, chemicals, tobacco, and natural resources (primarily timber and coal). While
this might require “bolt on acquisitions,” Bonham
seemed to be signaling that the swashbuckling days
of hostile acquisitions and quick asset disposals to
pay down debt were over.1
Another signal of a shift in management’s
philosophy came in May 1994, when Hanson
announced that it would lengthen the payback
period required of new capital investments from
three or four years to fi ve or six years. The company stated that it had lengthened the required
payback period to take advantage of low interest
rates and continuing low infl ation. However, many
also saw the shift as an attempt to allay fears in the
fi nancial community that Hanson’s management
style was too focused on the short term. Moreover,
the move seemed to be consistent with Bonham’s
stated goal of increasing internal investments as a
way of generating growth.2 The growth that Bonham was talking about, however, was a far cry
from the 20 percent annual rate achieved under
the leadership of Hanson and White. According
to Bonham, “The reality is that we are living in
a low growth, low infl ation climate. To suggest
that you can continue to grow by 20 percent is out
of line.”3
Both Bonham and Clarke repeatedly stated that
they saw Hanson growing at about twice the rate of
infl ation during the 1990s, which suggested a growth
rate of around 6 percent, given British and American
infl ation rates.
Acquiring Quantum
The fi rst signifi cant strategic move under Bonham
occurred on June 31, 1993, when Hanson announced
that it had reached an agreement to purchase Quantum Chemical Corp., the largest U.S. producer of
polyethylene plastics, in a stock swap that valued
Quantum at $20 per share, or $720 million. The
purchase price represented a premium of 60 percent
over Quantum’s closing price of $12.50 on June 30.
Hanson also stated that it would assume all of Quantum’s $2.5 billion in debt. The acquisition added to
Hanson’s U.S. chemical operations, which included
SCM Chemicals, the world’s third largest producer
of titanium dioxide.
According to observers, the acquisition represented
a strategic bet by Hanson that a protracted cyclical
downturn in the polyethylene business was nearing
an end. At the peak of the last plastics cycle in 1988,
Quantum earned $760 million. However, Quantum
had saddled itself with the $2.5 billion debt load in a
1989 restructuring, undertaken while plastics prices
were at their previous cyclical peak. Massive debt service requirements and a slump in polyethylene prices
had left Quantum with a 1992 loss before accounting
charges of $118.4 million, or $3.98 per share. One
immediate fi nancial benefi t of the acquisition was that
Hanson was able to use its superior credit rating to
refi nance Quantum’s debt (much of which was in the
form of junk bonds with an average yield of more
than 10 percent) at rates closer to Hanson’s 5 percent
borrowing costs. This move alone cut Quantum’s
$240 million annual interest bill in half.4
In retrospect the Quantum acquisition turned out
to be particularly well timed. Prices for low density
polyethylene bottomed out in the summer of 1993 at
$28 per gallon. By the end of 1994 they had risen to
$33 per gallon.5
Quantum’s profi ts turned out to be
highly leveraged to prices. As a result of this leverage
and lower interest payments, Quantum’s chemical
operations earned almost $200 million in fi scal 1994,
more than $300 million ahead of its 1992 results.
Quantum’s results helped Hanson to rebound from
its poor showing in 1993. For 1994 it reported a
32 percent rise in pretax profi ts and a record operating profi t of £1.23 billion ($1.92 billion).6
48567_39_case25_p356-361.indd C357 9/3/09 3:28:25 AM
C358 Section B: Corporate Level Cases: Domestic and Global
1993–1994 Disposals
Throughout 1993 and 1994, Hanson proceeded with
a series of relatively minor asset disposals. The objectives of these disposals were twofold: fi rst, to focus
the company on its core businesses and, second, to
help pay down Hanson’s enormous debt load, the
legacy of its acquisitions including Quantum. In fi scal 1993 Hanson’s long-term debt stood at £7.22 billion ($11.5 billion), and its debt to equity ratio was
1.83 (see Exhibit 1). This debt load was beginning to
trouble the fi nancial community, who were starting
to question the ability of Hanson to maintain its historically high dividend. In a previous era Hanson had
quickly paid down debt from acquisitions by raising
cash through asset disposals, but there had been little
movement in this direction since the late 1980s.
Between January 1993 and August 1994, Hanson sold more than fi fteen companies for a total of
£815 million ($1.3 billion). These disposals included
its Beazer home building operations in both the
United States and the United Kingdom; an offi ce
supply business; and Axelson, an oil industry equipment group.7
Spinning Off U.S. Industries
The next big strategic move occurred in February
1995, when Hanson announced that it would spin
off thirty-four of its smaller American-based companies into a new entity called U.S. Industries under
the leadership of David Clarke. Hanson would
retain ownership over several of its larger U.S. operations, including Quantum Chemical and Peabody
Coal. The new company was to include such wellknown brand names as Jacuzzi whirlpools, Farberware cookware, Ames garden tools, Rexair vacuum
cleaners, and Tommy Armour golf clubs. In 1994 the
thirty-four companies had sales of $3 billion and
operating profi ts of $252 million. The company was
to be responsible for $1.4 billion of Hanson’s debt.
According to one analyst,
For Hanson, it achieves a one shot divestiture of a number of companies they may have
struggled to sell independently, not because the
individual assets are unattractive, but because
it’s messy to sell so many of them. They are
able to divest in a tax effi cient way and at the
same time take a lot of cash out, leaving them
with the ability to buy something else.8
The spinoff was completed on June 1, 1995. At the
time, David Clarke stated that the new company’s
fi rst objective would be to reduce its debt load, primarily by selling off a number of companies valued
at $600 million.9
Acquiring Eastern Group
Only July 31, 1995, Hanson announced that it
would acquire Eastern Group, one of Britain’s major
electric utilities, for £2 billion ($3.2 billion). Eastern,
which was privatized in 1990, has a customer base
of 3 million and is responsible for 15 percent of the
electricity produced in Britain, primarily for natural
gas-fi red generating facilities. Eastern is also the seventh largest natural gas supplier in the country. In
the year ending March 31, 1995, Eastern’s earnings
were up 15 percent to £203 million ($324 billion) on
revenues of £2.06 billion ($3.2 billion).10
Hanson stated that it was attracted to Eastern
by its steady earnings growth. However, critics noted
that the deal yet again stretched Hanson’s balance
sheet, which once more had begun to look solid
after the U.S. Industries spinoff. The debt-fi nanced
purchase of Eastern caused Hanson’s debt-to-equity
ratio to shoot up from 37 percent to 130 percent,
once more raising concerns that Hanson might not
be able to service its historically high dividends.
A partial response to these concerns came in December 1995, when the company announced plans to
dispose of two additional U.S. subsidiaries—Suburban
Propane and Cavenham Forest Industries—for
£1.5 billion ($2.4 billion). The proceeds were to be
used to pay down Hanson’s debt load. Analysts calculated that the cash raised from these spinoffs would
reduce Hanson’s debt-to-equity ratio to around
90 percent.11
The Demerger
By late 1995 it was becoming increasingly clear
within Hanson’s senior management team that drastic action would be required to boost the company’s
lagging share price.12 As the British and American
economies continued in their long recovery from
recession, Hanson’s cyclical business staged a signifi –
cant performance improvement, with operating profits increasing by 44 percent for the fi scal year that
48567_39_case25_p356-361.indd C358 9/3/09 3:28:25 AM
Case 25 Hanson PLC (B): Breaking It Up C359
*Data as originally reported; prior to 1988 as reported in 1987 Annual Report. Based on UK GAAP.

Average exchange rates for income data; fiscal year-end exchange rates for balance sheet.

Excludes discretionary operations and reflects merger or acquisition.
§
Reflects merger or acquisition.
¶Before special items.
Exhibit 1 Hanson PLC—Financial Data
Income Data (million £)*
Year
Ended
Sept.
30
($)
Per
pound† Revs.
Oper.
Inc.
%
Oper.
Inc. of
Revs.
Cap.
Exp. Depr.
Int.
Exp.
Net
Bef.
Taxes
Eff. Tax
Rate
Net
Inc.¶
%
Net
Inc.
of
Revs.
Cash
Flow
1994 1.509 11,199 1,633 14.6 293 401 545 1,346 20.9% 1,065 9.5 1,466
1993 1.523 9,760 1,288 13.2 301 310 600 1,016 27.8% 734 7.5 1,044
1992 1.822 8,798 1,322 15.0 279 254 777 1,286 15.3% 1,089 12.4 1,343
1991‡ 1.820 7,691 1,327 17.3 266 216 741 1,319 21.5% 1,035 13.5 1,251
1990‡ 1.700 7,153 1,236 17.3 247 180 638 1,285 24.4% 971 13.6 NA
1989‡ 1.690 6,998 996 14.2 192 124 330 1,064 23.6% 813 11.6 NA
1988‡ 1.770 7,396 923 12.5 198 127 287 880 23.2% 676 9.1 NA
1987§ 1.560 6,682 749 11.2 151 105 300 741 22.8% 572 9.6 NA
Balance Sheet Data (million £)*
_______ Curr. _______
Sept.
30
($)
Per
pound† Cash. Assets Liab. Ratio
Total
Assets
Ret.
on
Assets
LongTerm
Debt
Common
Equity
Total
Inv.
Cap.
% LT
Debt
of
Cap.
% Ret.
on
Equity
1994 1.566 6,815 9,933 6,704 1.5 21,536 4.7 5,038 4,598 9,768 51.6 24.9
1993 1.525 8,067 11,636 7,065 1.6 24,057 3.3 7,221 3,953 11,266 64.1 18.0
1992 1.779 8,445 11,204 6,386 1.8 20,541 5.9 5,069 4,224 9,430 53.8 28.9
1991 1.750 7,771 9,955 4,751 2.1 16,583 6.6 4,880 3,325 8,351 58.4 33.6
1990 1.870 6,883 8,993 4,226 2.1 14,754 7.6 4,258 2,834 7,222 59.0 50.1
1989 1.620 5,309 7,454 3,269 2.3 10,825 8.7 4,971 1,046 6,133 81.1 50.1
1988 1.690 3,860 6,158 2,463 2.5 7,812 9.5 2,124 2,192 4,659 45.6 34.1
1987 1.630 3,059 5,014 2,083 2.4 6,375 8.8 1,727 1,730 3,745 46.1 35.5
48567_39_case25_p356-361.indd C359 9/3/09 3:28:25 AM
C360 Section B: Corporate Level Cases: Domestic and Global
ended in September 1995. Despite this performance,
the company’s share price had been essentially fl at
since the early 1990s (see Exhibit 2). Over the same
period both the London and New York stock markets had increased substantially. By the end of 1995
the price-to-earnings ratio of Hanson’s shares was
30 percent below that of the average stock on the
London exchange, while Hanson’s dividend yield at
over 6.5 percent was among the highest offered by
any company. It seemed that nothing could move the
stock price, not the strong profi t performance, not
the spinoff of U.S. Industries, not the Eastern acquisition, and not the recently announced disposals.
It was against this background that Hanson
stunned both London and Wall Street with its
January 29 announcement that it would divide the
company up into four independent businesses, effectively dismantling the conglomerate assembled by
Hanson and White. Hanson stated that it would
split into a chemicals business, an energy company, a
tobacco company, and a building materials enterprise.
Imperial Tobacco would be the largest company,
with sales of £3.57 billion ($5.37 billion). The energy
business, which would include Hanson’s coal and
electric businesses, would have sales of £3.5 billion
($5.27 billion). The chemicals business would have
sales of £2 billion ($3.04 billion), while the building
materials group would have sales of £2.3 billion
($3.48 billion).13 Bonham was to run the energy
business, while Hanson was to take over the building
materials group until his retirement. The company
estimated that the demerger would be completed by
early 1997.
Hanson’s stock price initially surged 7 percent on
the news, but it fell later the same day and ended up
less than 0.5 percent. The lack of a sustained positive reaction from the stock markets on both sides
of the Atlantic puzzled Hanson’s managers. Over the
last few years, a number of diversifi ed companies
had announced demergers—including ITT, AT&T,
and Sears—and their stock prices had almost always
responded in a very positive fashion. In Hanson’s
case, however, this did not occur.
One possible explanation for the lack of a favorable reaction came from Moody’s Investor Service,
which put Hanson’s debt under review for a possible
downgrade one day after the breakup was announced.
Moody’s noted that “this is a highly complex sequence
of transactions which are at an early stage and which
will require various approvals.”14 Among the concerns expressed were that the demerger might raise
Hanson’s borrowing costs. The tax consequences
of the demerger were also not immediately apparent, although there were some indications that there
might be some one-time capital gains tax charges.
Moreover, several stock analysts commented that the
1965 70 75 80 85 90 95
3,000
2,000
1,000
500
200
100
60
Log scale
0.4
1965 70 75 80 85 90 95
300
200
100
50
20
10
5
1
Share Price Relative to
the FT-SE-A All-Share Index
Share Price (pence)
Log scale
Lord Hanson Derek Bonham
Exhibit 2 Hanson PLC
48567_39_case25_p356-361.indd C360 9/3/09 3:28:26 AM
Case 25 Hanson PLC (B): Breaking It Up C361
demerged Hanson units might not be able or willing
to maintain Hanson’s historically high level of dividends. One infl uential London-based stock analyst
also noted that unlike most conglomerates that were
demerging, there were few if any hidden assets at
Hanson. This analyst calculated that Hanson’s constituent parts should be valued at 194 pence, which
was below the 212 pence price that Hanson’s stock
closed at on January 30, 1996.15
As a further prelude to the demerger, in March
1996 Hanson announced the sale of its remaining
U.S. timberland operations to Willamette Industries
for $1.59 billion. This sale followed Hanson’s disposal of Cavenham Forest Industries in December
1995, and it completed Hanson’s exit from the timber business. The cash generated from the sale was to
be used to pay down Hanson’s debt.16
Endnotes
1. R. A. Melcher, “Can This Predator Change Its Stripes?”
Business Week, June 22, 1992, 38; J. Guyon, “Hanson
Crosses the Atlantic to Woo Investors,” Wall Street Journal, December 6, 1983, 7D.
2. R. Rudd, “Hanson Increases Investment Payback Time,”
Financial Times, May 16, 1994, 15.
3. P. Dwyer and J. Weber, “Hanson Looks for a Hat Trick,”
Business Week, March 14, 1994, 68–69.
4. S. McMurray, “UK’s Hanson to Buy Maker of Polyethylene,” Wall Street Journal, July 1, 1993, A3.
5. D. Wighton, “Conglomerate’s $3.2 Billion Gamble Pays
Off,” Financial Times, December 2, 1994, 23.
6. “Hanson Posts 32% Rise in Pre Tax Profi ts,” Wall Street
Journal, December 2, 1994, B3.
7. P. Taylor, “Hanson Lifted by Quantum Chemical,”
Financial Times, August 17, 1994, 13.
8. R. W. Stevenson, “Hanson Plans to Spin Off 34 U.S.
Companies,” New York Times, February 23, 1995, C1.
9. L. L. Brownless and J. R. Dorfman, “Birth of U.S. Industries Isn’t Without Complications,” Wall Street Journal,
May 18, 1995, B4.
10. D. Wighton, “Hanson Plugs into New Current,” Financial Times, July 31, 1995, 15.
11. D. Wighton, “Hanson Seeks £1.5 Billion from U.S. Disposals,” Financial Times, December 21, 1995, 13.
12. “Widow Hanson’s Children Leave Home,” Economist,
February 3, 1996, 51–52.
13. R. Bonte-Friedheim and J. Guyon, “Hanson to Divide
into Four Businesses,” Wall Street Journal, January 31,
1996, A3.
14. Bonte-Friedheim and Guyon, “Hanson to Divide into
Four Businesses.”
15. D. Wighton, “Centrifugal Forces That Pulled Hanson
Apart,” Financial Times, January 31, 1996, 18.
16. “Hanson to Sell Mills,” Wall Street Journal: Money &
I

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