the times | Thursday November 25 2021 49

CommentBusiness

Building big must become a priority

if the West is to compete with China

President Biden’s

infrastructure

spend will be less

than he hoped for

D

emergers are back on the

agenda. The past

fortnight has seen three

leviathans — Johnson &

Johnson, General Electric

and Toshiba — announce proposals

to break themselves up in an

attempt to unlock value.

The question for those companies,

each more than a century old, is

what took them so long.

The natural desire of chief

executives to preside over bigger

businesses is an obvious answer.

Only rarely do bosses have the

humility to deliberately shrink the

size of their company, and

particularly if it involves being paid

less as a result.

Rarer still is the chief executive

prepared to admit, in effect, that the

businesses they oversee would

benefit from the more focused

management approach made

possible by demerger.

It is a curiously conservative

attitude, given the successes resulting

from demergers in this country

during the past couple of decades.

Some, like the old Great Universal

Stores, which on its break-up begat

two FTSE 100 companies in

Burberry and Experian and a third

mid-cap in Argos, are well known.

Yet there are plenty of decent

examples among less heralded

businesses that did the splits.

One is BBA, whose demerger in

2006 of its fabrics business,

Fiberweb, left it as a focused

aviation company. Investors holding

both after the break-up ultimately

benefited. BBA’s stock market

valuation before the demerger was

£1.41 billion; Fiberweb was acquired

as long ago as 2013 for £183 million,

while the rechristened Signature

Aviation, which had admittedly been

subsequently bulked up, was bought

this year for £3.4 billion.

Or take Bunzl, which sacrificed its

cherished FTSE 100 status when, in

2005, it demerged Filtrona, then a

cigarette filter maker. The entire

business was valued at £2.2 billion

when the spin-off was announced.

The market capitalisation of Bunzl,

which again has admittedly been

bulked up since, sits at £9.6 billion

while Essentra, the rechristened

Filtrona, is worth £951 million and

has been valued even more highly in

recent years.

Yet even those companies

sufficiently emboldened to

contemplate break-ups are arguably

still being too conservative. Among

them are three in the Footsie’s

highest echelons.

GlaxoSmithKline has set in train

the demerger of its consumer

healthcare arm, while Unilever

agreed to sell its tea business last

week to CVC, the private equity

firm. That followed the 2018 sale of

its spreads business, including the

Flora brand, while Alan Jope, chief

executive, has also talked about

“evolving” Unilever’s portfolio. That

has led to speculation that the

consumer goods group could exit

food and refreshments to focus on

beauty and homecare.

In the same sector, meanwhile,

Reckitt has in the recent past

reorganised itself into two units —

hygiene and health.

It would be remarkable, given the

chatter around all three, if the City’s

corporate finance laboratories were

not cooking up potential asset swaps

involving the trio.

Cranley MacFarlane, co-manager

of the £58 million EF Tellsons

Endeavour Fund and a shareholder

in Reckitt, said: “We feel these

companies should be under some

pressure, post the pandemic, to

further focus their portfolios, an

opportunity that private equity

appears to appreciate moving in on

these recent deals. Not only should

this improve their performance but

perhaps also garner further

competitive advantage against the

larger scale global leaders, like

Procter and Gamble and Nestlé.”

Were the three companies listed

in the United States, with its greater

tradition of shareholder activism,

such a process might already be

under way. But it certainly feels as if

each is facing, in the jargon, more

“portfolio optimisation”.

Simon Nixon

Ian King

failure to maintain assets but the lack

of those assets at all. There are still

800 million people without access to

electricity and 2.2 billion lack access

to safe drinking water.

Meanwhile, economic opportunities

are stifled by a dearth of ports, roads

and rail. The result is to deepen

economic misery, heighten instability

and drive further waves of migration

to the West. What’s more, these

problems are only heightened by

climate change and the transition to

clean energy, which will create vast

new requirements for infrastructure

investment.

Indeed, the International Monetary

Fund estimates the world is heading

for a global shortfall of $18 trillion in

infrastructure investment by 2040.

Yet at a time of ultra-low interest

rates and rising pension obligations

there is no shortage of global capital

seeking the long-term, steady returns

infrastructure can offer. The problem

lies in a lack of investable projects.

Even when the need has been

identified and the money budgeted, as

with America’s new infrastructure bill,

a host of obstacles must be overcome

before the first shovel goes into the

ground. Staff must be hired, projects

designed, planning consent secured,

regulatory structures established,

difficult decisions over public and

private-sector risk-sharing taken, and

complex financial structures created.

Overcoming these problems is

arguably the single biggest economic

challenge facing Western economies.

That is not just because their

competitiveness depends on it. There

is no solution to Britain’s productivity

problems, for example, that does not

hinge on improved connectivity. Nor

that the future of the planet depends

on developing structures to ensure

developing countries are not left

behind in the green energy transition.

It is because the credibility of

Western capitalism is also at stake.

China has been investing 8 per cent

of its GDP in infrastructure, while

funding projects in the rest of the

world via its Belt and Road Initiative.

The risk is the West gets left behind.

Yet new infrastructure will always

need to be paid for, either by higher

taxes or higher charges. There is little

in recent political debates, in Britain

or anywhere else, to

suggest this has been

fully internalised yet,

including by Boris

Johnson himself.

From his “Boris

Island” airport to

the garden bridge

across the Thames

to what his former

aide Dominic Cummings called “the

world’s stupidest tunnel” from

Scotland to Northern Ireland, Boris

Johnson has built a political persona

around a fondness for grand projects.

Which makes it all the more ironic

that so many of his current political

difficulties are infrastructure-related.

In recent weeks, his government

has come under fire over the

discharge of untreated sewage by

water companies that, for decades,

have failed to upgrade outdated

Victorian sewer systems; soaring

energy bills, driven in part by Britain’s

failure to invest in adequate gas

storage and nuclear power; and a

£96 billion national rail plan that may

be the largest in 100 years but fell

short of what he had promised in the

election manifesto.

That infrastructure has risen to the

top of the political agenda should

come as no surprise: it is a crisis

decades in the making. Infrastructure

accounted for about 12 per cent of

public spending in 1970; by the turn of

the century it had fallen to 3 per cent,

where it has remained. That reflects

the twin pressures governments came

under: to cut taxes to boost growth,

and to reorient spending towards

health and welfare — not least to

address challenges arising from an

ageing population. At the same time,

they have become increasingly

concerned with the need to keep

public debt low to maintain the

confidence of financial markets,

opting instead to push

responsibility for constructing

and maintaining vital

infrastructure as far as possible

onto the private sector.

This attempt had only partial

success. The privatisation

of the utilities under the

Thatcher and Major

governments, for

example, were in many

respects remarkably

successful in terms

of driving

improvements in

efficiency and

customer service, as well as keeping

customer bills low. But while the

regulatory model proved adequate to

ensure routine capital expenditure, it

proved hopelessly inadequate to drive

the scale of investment needed to

prevent water companies pumping

sewage into rivers 400,000 times in

2019. Thames Water, for example,
      paid its Australian owners £3 billion
      in dividends — then claimed it was
      too indebted to build a desperately
      needed supersewer under the
      Thames. Its customers are now
      paying for the Thames Tideway
      Tunnel via their bills.
      Other infrastructure models have
      proved similarly problematic. Public
      Private Partnerships, for example,
      have been used by the government to
      fund more than 700 projects with a
      capital value of about £56 billion,
      from schools to hospitals, roads and
      prisons. But these arrangements —
      the private sector builds assets that
      are then provided to the public sector
      in return for a long-term service fee
      — proved controversial when it
      emerged that banks were making
      substantial profits at public expense
      by refinancing loans once projects
      were completed, or because the terms
      of the service contracts were highly
      inflexible and offered poor long-term
      value for money.
      Britain is not alone in facing such
      problems. Most Western countries
      have scaled back public infrastructure
      investment over the past three
      decades — with similar results. In the
      US, Joe Biden has just succeeded
      where Donald Trump failed in
      securing passage of a $1.2 trillion bill
      designed to address crumbling
      infrastructure recently graded
      D+ by the World Bank, with
      roads, dams and energy
      installations scoring the lowest
      grades. Yet even this bill was half
      what the president had been
      seeking. Fixing the dire
      state of German
      infrastructure after
      years of fiscal
      austerity is a priority
      for the new coalition
      government,
      announced
      yesterday.
      The problems
      are even starker
      in developing
      countries, where
      the problem is
      not so much

‘‘

’’

Ian King is business presenter for

Sky News. Ian King Live is broadcast

on Sky News from 10-11am Monday

to Friday.

Breaking up seems hard

to do — but the rewards

make pain worthwhile

‘Only rarely do bosses

have the humility to

shrink the size of their

company, particularly if

it means being paid less’