It was a favoured phrase of the former chief executive of Smiths Group: if you started with a blank piece of paper, you would not create this company as it is today. Philip Bowman was repeating the thoughts of many a new boss faced with making sense of any conglomerate they have inherited.
His position suggested some pyrotechnics in the structure of the former Smiths Industries, but by the time he left in 2015 after eight years in the job, little had changed. Finally, though, the big bang looks like it might go off, with the company in talks about the separation of its medical devices unit, its largest business accounting for about a third of group revenues and profits and with 22 per cent margins.
The deal could be with ICU Medical, of the United States, named by Smiths as the other party involved in “very early stage discussions”. Separation is the word being used, as rumour has it that Smiths would like to merge its medical business with ICU, not sell. The reason is that Smiths Medical is in a spurt of device and product launches from which there will be future upside.
In addition, from a pensions perspective, a merger may make things more straightforward with the pensions regulators, even if Smiths’ retirement schemes are in surplus. In any event, a deal would be a £7.5 billion merger of near-equals, with Smiths Medical, whose mainstays are throwaway syringes and catheters, making £200 million of profits on £950 million of revenues, putting it at roughly three quarters the size of ICU.
We have been here before. Smiths Medical had at least two serious offers but rebuffed approaches in the early parts of the decade. Smiths is one of those heritage British engineering companies that people think they should care about but are not quite sure why. Founded as a Victorian clockmaker, it became a world leader in altimeters and pressure gauges. When Sir Edmund Hillary conquered Everest 65 years ago this week, it was with a Smiths timepiece on his wrist.
Long out of that game, the present Smiths is the product of its merger in 2000 with TI Group and the subsequent exit from aerospace seven years later. As well as healthcare, it is in the energy game, with John Crane; security, with Smiths Detection; and transportation and general industrials, with Flex-Tek and Interconnect.
Deconglomeration is much in vogue again. We are seeing it on a smaller scale at Meggitt and it was the fuse for the takeover of GKN. Andy Reynolds Smith, chief executive, has talked of pruning large parts of Smiths rather than outright deconglomeration, and of organic growth via returns on R&D. Less than three years in, investors have begun to fret whether this is the right course and if a sale of Smiths Medical could be seen as hybrid of his own plan and some proper, much-demanded M&A action.
All this gives what City analysts like to call a “value conundrum” — no one quite knows what Smiths is worth, trading as it always will at a discount to a sum-of-the-parts valuation. As there are also questions over long-term strategy, the valuation is even less clear.
What we do know is that the market has been buying the rumour. The stock is up by 20 per cent in two months to a new closing high of £17.50 last night.
An outright sale of Smiths Medical would prompt a huge return of cash to shareholders. A demerged joint venture probably won’t. At 19 times expected earnings, the stock has already priced in the M&A action, whatever it might turn out to be. Like the surgical procedures in which Smiths’ kit is involved, the stock is best looked at from the sidelines.
ADVICE Hold
WHY The shares have run up rapidly and there are no guarantees what a deal, if there is one, will look like
Baillie Gifford Japan Trust
The departure of a long-serving manager at an investment trust is a good time to examine whether it should be part of a portfolio (Greig Cameron writes). Sarah Whitley stood down from the Baillie Gifford Japan Trust at the end of last month, having been involved in running it since 1991.
The trust, as its name suggests, focuses on equities in Japan and typically it holds between 40 and 70 stakes. For those looking to gain direct exposure to one of the world’s largest economies, the trust’s historical performance offers encouraging signs. With its share price up by nearly 370 per cent over the past ten years, Ms Whitley, who has retired, bowed out with her head held high.
Stepping into the manager’s role is Matthew Brett. He also brings experience, having been on Baillie Gifford’s Japanese equities team since 2003 and co-manager of the trust with Ms Whitley since 2008. The transition would suggest that the philosophy of giving long-term backing to small and medium-sized companies that have the potential to grow rapidly is unlikely to change.
In the trust’s interim results for the six months to the end of February, Ms Whitley outlined her belief that Japan was still an underappreciated market. She said that the number of good companies to choose from was much greater than when she started investing during the 1980s and that growth was reliant on global trends, rather than domestic ones.
The trust’s share price and net asset value growth is comfortably ahead of its benchmark, the Tokyo stock price index, on annual,
three-year and five-year measures. It has its largest exposure in the commerce and services sector, with 21.5 per cent of its total assets. Its largest single holding is in Softbank, a conglomerate with interests spanning areas including telecoms, manufacturing and financial services. Others among the trust’s top stakes include Yaskawa Electric, the industrial robot maker.
The trust’s shares peaked at 882p in January before dipping back down below 800p. Since mid-April there has been a recovery and they were changing hands for 850p yesterday.
ADVICE Hold
WHY Japan’s growth may be starting to slow, but the trust has a good track record of finding strong performers
