Smiths Group and British Land

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“A further slump in oil prices served to drag down the FTSE 100 on Wednesday, falling 0.7% to 7005. Royal Dutch Shell and BP were among the key index fallers, alongside the big mining stocks and various packaging companies. Markets were also weak across mainland Europe and parts of Asia.

“The pound barely moved against the euro and US dollar as markets eagerly awaited an update from UK Prime Minister Theresa May on a draft Brexit agreement,” said Russ Mould, Investment Director at AJ Bell.

Smiths Group

“It feels like the market has been speculating about a break-up of industrial conglomerate Smiths Group for more than decade and we’re finally seeing some traction.

“The decision to separate out the medical division shouldn’t come as a surprise, it didn’t really fit with the rest of the engineering group whose interests range from airport security scanners to components for the aerospace and construction industries.

“Full-year results published in September showed the medical arm to be one of the group’s weakest parts and this has been the case for some time.

“A failed merger for the unit with ICU Medical earlier this year also raised speculation that Smiths’ logical next move would be a separation. Full details on how it will be split from the group have yet to be announced.

“There is a trend for companies to have a tighter focus and not be all things to all people. Separating business divisions can help the parent company be leaner and meaner, and for the orphaned operations to have a new life of their own with potentially more entrepreneurial decisions by management.

“As a standalone business, one cannot rule out Smiths Medical being subject to further takeover interest, despite the failed merger with ICU this year, an unsuccessful attempt to sell the business in 2013 and a rejected private equity approach in 2011.

“It is easier for a suitor to swoop on a separated business than to attempt discussions with a conglomerate owner which may be slow with its negotiations and decision-making and may not have realistic expectations on valuation.

“One could even speculate that the wheels are in motion for a further break-up of Smiths Group. The next step might be to separate John Crane, which is Smiths’ energy and chemicals engineering arm. It reported 5% underlying revenue growth in the past financial year. Demerging the business could allow it to pursue mergers and acquisitions to potentially accelerate growth.

“Separating the detection business might also be an option, particularly as trading has been good of late.

“The downside of separating a business from a conglomerate is that it removes or reduces a diversification cushion. Theoretically if one unit underperforms then another comes to the rescue in terms of supporting group earnings. However, with Smiths a lot of focus has been given to the weaker parts of the business in the past as opposed to the progress made elsewhere.”

British Land

“Today’s first half results reveal that a resilient performance from British Land’s portfolio of offices has not been sufficient to spare the property group from the pain associated with its retail holdings.

“These include supermarkets, retail parks, department stores, and perhaps most notably the large Meadowhall shopping centre in Sheffield.

“Exposure to retail has seen both the value of its assets downgraded and the level of income fall as a number of the company’s tenants use Company Voluntary Arrangements to trim their rent bills.

“Coming a day after its main peer Land Securities issued its own update, British Land suffers a little by comparison with overall valuations down 1.9% against a 1.4% fall at its counterpart.

“British Land made several disposals in the six-month period but apparently doesn’t see anything material of value to acquire, instead reducing its loan-to-value and continuing to return surplus funds to shareholders through a buyback.

“The current strategic plan is to maintain its office-based assets at a little more than half the portfolio, trim retail to around a third and boost residential up to around 10%. Whether this altered mix will help restore the firm’s fortunes in the medium-term, only time will tell.”

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