Demergers and the Hanson experience. Part two: Demerger tactics

Following the first demerger of one of its divisions in the United States in 1995, US Industries, the Hanson conglomerate used the experience of this successful spin-off in preparation for its much larger and complete break-up planned for 1996, into four companies: Hanson, Energy, Imperial Tobacco and Millennium Chemicals. Part Two of this article investigates legal ways of demerging in the UK, and considers aspects of the 1995 USI demerger, which already showed some of the legendary Hanson skill in the management of restructuring. In the run-up to the 1996 demerger, the article looks at all the strategic and management skills that Hanson brought to the demerger operation to strengthen the companies' exit from the conglomerate. These were certainly needed since, as Part One of this article showed, the conglomerate had many weaknesses, which had developed since the late 1980s and which had not gone unnoticed by the stock market. The tactics used by Hanson included an active disposals programme, the reallocation of net debt among the companies and bank funding for them, minimisation of capital gains and income tax, and redemption of part of the conglomerate's bond holdings, a poison pill, and reductions in dividend payouts. A sample of broker valuations, made in early 1996, is observed, where sum-of-the-parts valuations were used. These are compared to actual share trading performance between October 1996 and January 1997, and the divergence examined. Academic evidence on the share performance of spin-offs in the US is considered. Finally, the article examines whether Hanson's and its demerged companies' shares were justifiably over- or under-valued in the three months following the demerger and flotation.