Corporate Profile: The outsider

NO ONE could blame Greg Hutchings, the pounds 1m-plus-a-year chairman of Tomkins, for the occasional bout of despair.

Mr Hutchings cringes at the "buns to guns" tag that Tomkins has been landed with because of its ownership of Mother's Pride on the one hand and Smith & Wesson on the other. But he is even more exasperated at the lack of appreciation shown by the City.

He has a point. The financial track record of Tomkins has been almost unrivalled since he joined in 1983. Profits at what began life as a West Midlands maker of fasteners and buckles have grown from pounds 1.6m in 1983 to an expected pounds 500m this year. Employees have soared from 400 to over 60,000 and dividends to shareholders have grown at a compound rate of 15 per cent.

And yet, Tomkins' share price has been put through the mangle. In the past 12 months the shares have roughly halved back to levels seen five years ago, and Greg Hutchings' pride and joy has been removed from the FTSE 100 index.

Why is Tomkins so unloved? Profits growth this year will be less than in previous years and the stock market is expecting only a small increase in profits for the year to May - to a little over pounds 500m - although dividend growth is expected to be a solid 14 per cent again.

But that is not the reason for Tomkins' near demise. Partly it is a question of stock market fashion. Almost all the conglomerates that dominated the market in the Eighties have gone. Some, such as Hanson, have broken themselves up. Or, like Williams, they have re-invented themselves - in Williams' case as a fire protection and security company. BTR has been swallowed up, prior to an effective break-up, by Siebe. Even GEC, which once hoarded companies as avidly as its cash, has restructured.

To find the moment when Tomkins began to lose its fan club, one must go back seven years to its acquisition of the Rank Hovis McDougall bread, cakes and grocery group (RHM). The market never liked the pounds 970m deal and it has punished the company's share price ever since.

"Investors these days are looking for increased focus. Tomkins is really the last of the great diversified conglomerates," says Andy Chambers of SG Securities.

The new fashion has not passed Tomkins by. Since 1997 it has sold more than 20 businesses and tried to persuade investors that it is "focused" on three core areas: construction components, food manufacturing and industrial and automotive engineering.

In December, the company finally managed to escape from the leper-like diversified industrials sector of the stock market and was re-classified as an engineer. Little good it has done them.

There is also the problem of Smith & Wesson's smoking gun. Product liability lawyers in the US have been limbering up for action. In a case in New York, which ended in February, a jury said that Smith & Wesson was not negligent in the way it distributed its guns, although some other gun manufacturers were. Out of seven cases against gun makers, only one has resulted in damages - of around $500,000 - but municipal suits are pending in New Orleans, Atlanta and Chicago.

Smith & Wesson accounts for less than 1 per cent of Tomkins' profits but a jumpy stock market may fear a flood of negative judgements.

Tomkins' longest-established, but in the UK probably least well-known, business is its pounds 1.2bn construction components division,located entirely in the US. It now takes in grilles, air conditioning louvres,baths, showers and acrylic whirlpools, together with PVC plumbing products and wheels for recreational vehicles.

Doubts that there is any synergy between such a disparate clutch of activities are countered by Tomkins' assertion that a large number of these products all end up on, for example, US recreational vehicles, so it is a one-stop shop for customers in this growth market.

RHM is clearly a major player for Tomkins. It is the UK's largest flour miller with a 28-per-cent market share, bolstered by the addition of two mills from Dalgety last year. Despite a relentless series of "Bread Wars" waged by the major supermarket groups, it has got behind its Hovis brand, which is the UK market leader lifting sales by 50 per cent in the past five years.

Through Mr Kipling, Cadbury's Cakes and Lyon's Cakes it holds the top three brands with over 20 per cent of the pounds 1bn-a-year UK cake market. Plus, RHM is a brand leader in groceries.

Tomkins has also been visibly flexing its manufacturing muscles. Since 1992 it has lopped 26 per cent off the head-count in milling and baking and cut its unit-operating costs by 13 per cent. Its reward has been a 60 per-cent-rise in profits since 1994 in food manufacturing to pounds 160m, and a fattening-up of profit margins to 9 per cent.

Successful marketing campaigns have rejuvenated Tomkins' traditional brands from time to time in the UK, but the option of turning, say, Mother's Pride or Mr Kipling into global brands is not realistic. So Tomkins' food operations have also been hitching their wagons to the growth areas of the food market and expanding their overseas baking activities in France and Belgium

Long-standing relationships with Marks & Spencer in cakes and now chilled foods have been strengthened to include Whitbread. Fast foods have also given Tomkins an indirect presence outside the UK as a sole supplier of dough bases to Pizza Hut in the UK and Europe.

And, with the purchase of Golden West Foods last year, the company has become the top UK supplier of buns, drinks, sauces and distribution services to McDonald's Restaurants in the UK and mainland Europe.

Until 1996, few would have regarded Tomkins as a serious engineer. It has since built up a pounds 1.6bn industrial and automotive and engineering arm to match its food manufacturing operations.

The process began in 1996 with the watershed acquisition of Gates, a global, US-based supplier of automotive and industrial transmission belts, hoses and connectors. The following year Tomkins paid pounds 360m for Stant, a supplier of windshield wipers and fuel tank filler caps, and in 1998 it topped up its automotive portfolio with the pounds 155m acquisition of Schrader- Bridgeport, which makes fluid controls.

Tomkins' US engineering companies all have substantial shares of their chosen markets, and the product ranges of Stant and Schrader-Bridgeport can be fed into Gates' well-established global network to supplier automotive makers around the world.

Down the road there are further opportunities to consolidate the automotive component supplier base and improve profits. The problem for investors is that this gives Tomkins a schizophrenic image. It is hard to believe that fund managers have views about the relative attractiveness of food manufacturing and automotive components - let alone whirlpool baths - that coincide exactly with those of Tomkins.

It is more likely these days that they would prefer to invest separately in major suppliers and adjust their holdings in each one as market prospects changed.

There's not that choice with Tomkins. "We believe that the offer to buy back shares is a recognition by the company that the option of continuing to operate Tomkins as before has run out," says Arend Dikkers of Salomon Smith Barney.

In other words, Tomkins is under pressure to decide whether it is an engineer, a food manufacturer or a maker of whirlpool baths.

With a market worth less than two-thirds of the level of its pounds 5bn sales base, and healthy profit margins, there is a chance that others may make the decision for Tomkins since, despite the Smith & Wesson factor, the huge cash flows from RHM could entice buy-out or break-up exponents.

Snap Shot

Chairman: Greg Hutchings

Employees: 66,000

1998 turnover: pounds 5bn

1998 pre-tax profit: pounds 500m

Market capitalisation: pounds 3.2bn

Activities: Engineering 33%; food 33%; components 28%; professional, garden and leisure 5%

Consumer brands: Hovis, Mother's Pride, Lyon's Cakes, Sharwoods, Smith & Wesson

Major acquisitions: Phillips Industries, Rank Hovis McDougall, Gates, Stant