UK: THE HANSON INHERITANCE.

UK: THE HANSON INHERITANCE. - With his focus on financial results and how to present them, Lord Hanson has built up a reputation as Britain's most influential industrialist. But that seems to be the sum total of his achievement.

by Matthew Lynn.
Last Updated: 31 Aug 2010

With his focus on financial results and how to present them, Lord Hanson has built up a reputation as Britain's most influential industrialist. But that seems to be the sum total of his achievement.

In 1991, soon after his company had bought a controversial stake in ICI which had been widely perceived as a prelude to a full bid, Lord Hanson gave an interview to the Financial Times. In it, he spoke of the possibility of creating Imperial Hanson Industries through a merger of the chemicals and pharmaceuticals giant with his own sprawling and disparate, deal-driven conglomerate. It was a revealing idea; the combination of the words Imperial and Hanson clearly flattered a man who has always regarded himself as the sharpest businessman of his generation. And it was a choice that reflected the kind of legacy he wished to leave behind him.

Five years later, however, it is clear that Hanson's legacy will be very different. The Imperial Hanson Industries proposal was ground into dust by a skilful defence led by Sir Denys Henderson, which rattled loose for the first time many of the skeletons in Hanson's closet, and which left the reputation of the conglomerate permanently tarnished. Now it appears the legacy of a man who was for the best part of two decades the most influential industrialist in the country will be four undistinguished companies that will struggle to make it into the FT-SE 100.

Earlier this year, Hanson announced a plan to demerge Hanson into four parts, the final act in a drama which had been characterised by some of the most ruthless empire-building in corporate history. These four companies are worth studying in some detail since their creation is what Hanson has achieved through three decades of wheeler-dealing, and their merit or otherwise will allow followers of his career to form a judgment on his achievements.

One of the largest of the four Hanson babies will be Imperial Tobacco, the cigarette business acquired as part of the takeover of the Imperial Group in 1986. Sympathetic analysts estimate that it will have a market capitalisation of between £2.5 billion and £3 billion. Imperial will have some valuable assets. Its plant in Nottingham is generally considered to be the most efficient cigarette factory in Europe. But it will have severe weaknesses which are likely to be exposed once it is a separately listed company. It is heavily dependent on the UK market, which is now in steady and remorseless decline. And because of the reluctance to invest which has always been a hallmark of the Hanson management style, Imperial has not moved into emerging markets in the same way that its international rivals have done; it has made a belated move into Taiwan and China, but is considered years behind other manufacturers. Essentially Imperial will be a profitable domestic producer, in a relentlessly declining market, with no growth possibilities.

The other large company will be the chemicals group which analysts estimate will be valued by the market at between £3 billion to £3.3 billion. It consists largely of two US chemicals companies, SCM and Quantum, with leading market positions in their own categories of industrial chemicals.

It too, however, will be far from a high-growth business. Salomon Brothers, for example, estimates sales for the chemical company of $3,270 for 1999, compared with $3,207 in 1995; profits will be more disappointing, at an estimated $855 million for 1999, compared with $914 million last year.

The third company will be the energy business which consists largely of Eastern Electricity in this country and Peabody, the American coal-mining business. Few estimates of the likely market value of this company are available, since the market is still puzzled by the logic of a company that combines a British regional electricity utility with an American coal-mining operation. Neither is expected to be a high-growth business.

And few expect the two sides of the business to remain together for long.

It is suspected that Eastern will in due course return to its own stand-alone UK listing, casting doubt on the point of it being taken into the Hanson fold last year. The final business to retain the Hanson name will be largely a building materials company, although analysts generally refer to it as the Hanson Rump, since it largely appears to consist of companies picked up over the years, which do not quite fit into any of the other three companies. Judgment is being suspended on this company while its composition remains unclear.

This, then, will be Lord Hanson's legacy. Is it one that will merit a description of Hanson as one of the most successful British industrialists of the past three decades? To start to answer that question it would be useful to reflect first on the huge amount of energy and money that has been sunk into the creation of these four business.

Though he is sometimes portrayed as such, Hanson was never a self-made man. His father, Bob Hanson, was a successful north countryman who had built his Huddersfield-based road haulage company into one of the largest trucking businesses in the country. This was nationalised in 1948 for £3 million, and although the exact division of that money between Bob Hanson and his partner Charlie Holdsworth has never been made clear, it is likely that the bulk of it went to Hanson. This raises the intriguing possibility that, for all his aura of success, Hanson has never actually been much good at making money himself. If £3 million had been invested in the stock market in 1948 it would be worth £1.2 billion today. And yet, the latest Sunday Times rich list estimates that Lord Hanson and his son Robert are worth between them £45 million - even less than what £3 million was worth in 1948.

It was not, however, for want of trying. In the three decades that Hanson, along with his long-term partner, the late Lord White, has been controlling a public company, an extraordinary number of assets have been shifted in and out of the Hanson camp. In all, Hanson has bought 35 different companies in agreed takeovers, and another six in hostile takeovers, making a total of 41 acquisitions. At the same time, the company launched 15 unsuccessful hostile bids and, at one time or another, has taken significant share stakes in a further 22 companies. On the other side of the balance sheet, the company has made 40 significant disposals over the same period. The company has long been a kind of staging-post, through which various assets pass, and what is left now is merely what happens to be in the company's hands at the moment it decided to break itself up.

Has that massive level of activity been worthwhile? It certainly has for the City advisers who collected stratospheric fees on big takeover battles; even a hint of a Hanson bid has sent potential targets scurrying along to their merchant banks with cheque books open. But what about the shareholders who have followed Britain's most famed deliverer of value?

As with many companies that start from small roots, the early years were undoubtedly the best, with those lucky enough to have been in the original vehicle, Wiles Group, showing substantial gains. Those who got out in the early '80s have good reason to applaud Hanson and White. But since then there has been little for shareholders to celebrate. Almost from the moment when Hanson's salary started to sky-rocket in 1984 (from £177,000 to £1,263,000 in three years), the shares have significantly underperformed the market. And for those who have been lured into the stock in recent years by its eerily high dividend yield, there is genuine cause for concern that the current dividend cannot be supported for much longer by the company's cash-flow, whether it breaks itself up or not.

The idea that Hanson has provided poor returns to shareholders for over a decade will come as a surprise to those reared on years of corporate propaganda, filtered through the media by the company's PR adviser Sir Tim Bell, perhaps the most skilled and certainly the best connected press man in the business. Hanson has always concentrated on its earning-per-share figure, and used its consistent year-on-year increases in EPS as proof of the skills of its management. Yet EPS as a measure of corporate performance has now fallen into disrepute - not least because the manipulation of the figures by companies like Hanson has revealed its shortcomings as a measure.

Typical of Hanson's accounting treatment and its influence on EPS has been the use of provisions. Any company making an acquisition used to be able to take provisions in its accounts to cover reorganisation costs and so on, which in many cases can be a highly subjective number. It can then release provisions later on, and feed them into the profits numbers.

This means that the profits numbers, and hence the earnings per share figure, can be adjusted more or less at will. Hence, when a company makes as many acquisitions and disposals as Hanson, its reported earnings may bear little resemblance to the amounts of money being generated by the underlying businesses. For example, in 1993, Hanson released provisions of £332 million, out of total profits of £1,016 million, or more than a third; in 1994 provisions of £283 million were released, out of pre-tax profits of £1,346 million. With those kinds of provisions it is not hard to generate a rising EPS number. Currently the company has provisions in its books of a massive £5.5 billion, which compares unfavourably with shareholders' funds of just £3.6 billion. Of these, £1.3 billion have primarily been taken on acquisitions, which gives Hanson a significant level of control over the earnings it chooses to report for some years to come.

An even greater cause for concern from a balance sheet perspective are the other provisions. In Hanson's case these relate to huge pension liabilities in the US and to massive environmental liabilities which arise from its involvement in the chemicals and mining industries. The prospect of paying out £4.2 billion in cash at some time in the future for no return is mind-boggling. That such payments will not affect reported profits is cold comfort.

Hanson has played other games which have helped its profits performance but which have also left the market unsure about the stability of its businesses. One example is tax. Hanson has always been very skilful at tax planning, keeping it around the 20% mark most years (which also helps to boost the EPS numbers). Some would say that Hanson's low tax charge reflects the fact that its underlying profits are less than its results state. Although this may be partially true, the company has always operated a byzantine myriad of offshore companies to minimise its tax liabilities.

There is nothing illegal in such structures, but there is always the risk that its tax strategies could unravel, and it could be hit by massive tax demands. So complex has the tax strategy become, and so important has it been to keep the tax low to preserve the EPS performance, that its corporate strategy is now, in the opinion of many analysts, largely driven by tax rather than strategic or commercial considerations. For example, the market could see little benefit in the acquisition of Eastern Electricity, except for opportunities to play games with its tax charges.

Similarly the company has also always been very skilled at managing its debts and foreign exchange. For example, it has consistently borrowed in dollars and deposited funds in Europe, taking advantage of higher interest rates in Europe to turn a profit. Any adverse currency movements - which might be expected when different interest rates are on offer - were treated as currency adjustments and hence excluded from the profit and loss account. In some years this trick has accounted for £200 million of profits, or between 15% and 20% of the total. Even when such profits are authentic, they affect the quality of the earnings: to a significant extent shareholders are investing in a currency arbitrageur rather than an industrial holding company.

The endless tax and currency conjuring tricks have at times rebounded on the company. At the time of the ICI bid, the defence team scored some heavy PR hits with its revelations about Lord White. The fact that his dabbling in racehorses, for example, was being financed by the company went down badly with the fund managers who would have decided the outcome of a bid. But ICI also hired a team of investigative accountants to penetrate the maze of offshore companies used to reduce the tax bill.

It has long been rumoured that the prospect of their findings being released to the press was one of the factors behind the decision not to mount a full bid for ICI. Indeed, since then, the company has not pulled off a major hostile bid.

Of greater significance, however, is the charge that Hanson has been destructive of the businesses it owns and operates. The best documented case is Ever Ready, the battery company which came under its control as part of the hostile takeover of Berec for £95 million in 1981. At the time it took control, Ever Ready was the market leader in the UK, and Hanson thought it was buying a basic product with a virtual monopoly where it could cut costs ruthlessly and lift profits. In reality, by cutting research and development, by selling overseas subsidiaries and by refusing to invest in new products, Ever Ready effectively surrendered market leadership to Duracell, and Hanson ended up selling the British company for £132 million in 1992. This year it sold the South African subsidiary for another £95 million. Allowing for inflation, Hanson probably only made modest gains during its ownership of the company. More importantly, it proved Hanson has no ability to fight off competition - it just trades assets.

A similar story has been repeated at Imperial where, although it has improved the efficiency of the factory, it has failed to expand the company or even protect the market position of cigarette brands such as Embassy.

As can be seen from the list of businesses being created through the demerger, despite 30 years of acquisitions and supposedly quality management, there's not a single company with high-growth potential in the Hanson portfolio.

Worse still, Hanson is responsible for creating a particular kind of culture. The traditional defence of the company has been that the constant threat of takeover kept management on its toes. And yet it can be seen, with hindsight, that companies never benefited from being taken over by Hanson. Instead, the constant threat of takeover may well have encouraged others to adopt the same policies - of underinvestment and concentation on EPS - that have proved so damaging. Hanson alumni are now in charge of many other major companies: Wassall, Tomkins and De La Rue to name just a few. His financially driven management techniques have been carried by his disciples into much of UK industry.

Not everyone agrees its influence has been negative. Sir Owen Green, who over many years built up BTR into a larger conglomerate than Hanson, believes the company stimulated British management. 'They performed a useful task in livening up managements in companies where they had gone to sleep,' he says. 'I am sure they performed a useful function. To build up a business of that sort you had to be very financially driven.' But he does believe that by this year the company had run out of steam.'All of their businesses were mature companies bought on the knock-down. Therefore the capability for growth was very limited. They had to do something.'

But as the company prepares itself to be broken up, perhaps the final comment on it should be that Hanson himself does not appear to have been an enthusiastic shareholder in the company that bears his name. In 1968 Hanson held a stake in Wiles Group (as the company was then called) worth £25 million in today's money. Now his stake is worth less than £20 million. Whatever he has been doing with his salary of more than £1 million a year, it clearly does not include buying Hanson shares.

It is time that the rest of UK industry came round to the same view of the worth of the Hanson empire and the methods by which it was built.

In 1984 Lord Hanson's salary was a comparatively modest £177,000.

In the next three years while the company underperformed the market, its chairman's salary went up seven-fold. Every year since then he has been one of the highest salaried directors of a quoted company, even though the shares have continued to underperform. The 3.6 million share options which he currently holds would be worth well over £5 million if Hanson's shares had merely performed in line with the market. As it stands their value is under £1 million.

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