Strategy Management

Hanson PLC (B):

BREAKING IT UP
Roll No. Name
60025 Muskaan
60031 Rohit Kumar
60032 Ruchika Wardhan
60042 Sushant Saurav
Presented By :
CIMP
Derek Bonham
David Clarke
Key Protagonist
David Clarke
Other Key Players
Key Facts
During the 1970s and 1980s, Hanson PLC put together one of
the most impressive growth stories of any industrial company in
the world
Between 1973 and 1991, Hanson put together 29 years of
uninterrupted profit growth with revenues of $12.3 billion and
operating income of $2.13 billion
A bitter public relation battle with ICI( Imperial Chemical
Industries) , another acquisition target of Hanson damaged its
image
In September 1993, its businesses were suffering from the
effects of recession in both Britain and America, Hanson
reported 33 percent decline in after-tax profits to $1.5 billion,
the first, such decline in its history.
A New Direction?
In 1992, Derek Bonham and David Clarke took over as CEO for
Hansons British-based operations and American Operations
respectively.
Bonham and Clarke clearly lacked the predatory thirst that had
driven Hanson and White to acquisition
Bonham started focusing managements attention on improving
the performance of its core businesses in building materials,
chemicals, tobacco, and natural resources
Bonham signaled bolt on acquisitions that the days of hostile
acquisitions and quick asset disposals to pay down debt were
over
Shift in Managements Philosophy
In May 1994, Hanson announced to lengthen the payback period
required of new capital investments from three or four years to
five or six years
The reason stated that it had lengthened the required payback
period to take advantage of low interest rate and continuing low
inflation
Bonhams stated the goal of increasing internal investments as a
way of generating growth
Acquiring Quantum
On June 31, 1993, Hanson announced that it has reached to an
agreement to purchase Quantum Chemical Corp., the largest U.S.
producer of polyethylene plastics, valued at $720 million
The acquisition added to Hansons U.S. chemical operations,
which included SCM chemicals, the worlds third largest
producer of titanium dioxide
The acquisition represented a strategic bet by Hanson that a
cyclical downturn in the polyethylene business was nearing at
the end
Quantum had saddled itself with the $2.5 billion debt load in a
1989 restructuring, undertaken when plastic prices were at their
previous cyclical peak.
One immediate financial benefit of the acquisition was that
Hanson was able to use its superior credit rating to refinance
Quantums debt
Acquiring Quantum(Consequences)
One immediate financial benefit of the acquisition was that
Hanson was able to use its superior credit rating to refinance
Quantums debt
By the end of 1994, the prices for low density polyethylene had
risen to $33 per gallon from $28 per gallon in 1993
Quantums chemical operations earned almost $200 million in
fiscal year 1994
Quantums result helped Hanson to 34 percent rise in pretax
profits and a record operating profit of $1.92 billion
1993-1994 Disposals
Throughout 1993 and 1994, Hanson proceeded with a series of
relatively minor asset disposals.
The objective of these disposals were as follows; first to focus
the company on its core businesses and second to help pay
down Hansons enormous debt load
In fiscal year 1993 Hansons long term debt stood at $11.5 billion
and its debt to equity ratio was 1.83
Between January 1993 and August 1994, Hanson sold more than
fifteen companies for a total of $1.3 billion
Spinning Off U.S. Industries
In February 1995,the big strategic move of Hanson came with
the announcement that it would spin off 34 of its smaller
American-based companies into a new entity called U.S.
Industries.
Hanson would retain ownership over several of its larger U.S.
operations, including Quantum Chemical and Peabody Coal
In 1994, the 34 companies had sales of $3 billion and operating
profits of $252 million
The new company first objective would be to reduce its debt
load, primarily by selling off a number of companies valued at $
600 million.
Acquiring Eastern Group
In July 1995, Hanson announced that it would acquire Eastern
group, one of Britains major electric utilities, for $3.2 billion
Eastern Group has a customer base of 3 million and is
responsible for 15 percent of the electricity produced in Britain,
primarily for natural gas-fired generating facilities
In the year ending March 31, 1995, Eastern earnings were up 15
percent to $324 billion on the revenues of $3.2 billion
The debt-financed purchase of Eastern caused Hansons debt-to-
equity ratio to shoot up from37 percent to 130 percent, raising
concerns that it might not be able to service its historically high
dividends.
The Demerger
Hansons cyclical business staged a significant performance
improvement, with operating profits increasing by 44 percent
for the fiscal year 1995
Since the early 1990s, the companys share price had been
essentially flat whereas the London and New York stock markets
had increased substantially
By the end of 1995, the price-to-earnings ratio of Hansons
shares was 30 percent below the average stock on the London
exchange.
The Demerger(Continued)
Hanson stunned both London and Wall Street with its January 29
announcement that it would divide the company up into four
independent businesses
Hanson stated that it would split into a chemical business, an
energy company, a tobacco company, and a building material
enterprise
Bonham was to run the energy business, while Hanson was to
take over the building materials group until his retirement and it
was estimated that the demerger would be completed by early
1997
In March 1996, Hanson announced the sale of its remaining U.S.
timberland operations to Willamette Industries for $1.59 billion
Impact of the Demerger
Hansons 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 Hansons managers
The lack of favorable reaction came among the concerns
expressed were that the demerger might raise Hansons
borrowing cost.
The tax consequences of the demerger were also not
immediately apparent, although there might be some one-time
capital gains tax charges.
Stock analysts commented that the demerger Hanson units
might not be able or willing to maintain Hansons historically
high level of dividends
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