Hovis given the chance to rise

Tomkins is so loathed by the City that its share price drops even when it gives its detractors what they want. Yet the manufacturing conglomerate is home to some of Britain's best-loved brands.

Household names such as Hovis, Bisto and Paxo are etched on the nation's psyche. To many, Dvorak's New World Symphony will always be the Hovis theme tune first and foremost. Mr Kipling doesn't just dominate the cake market with his exceedingly dull advertising, "he" created it. Mother's Pride is bound up with memories of soggy primary school sandwiches, Bisto and Paxo with Sunday roasts.

Last week's announcement that Tomkins intends to spin off its European food business early next year in effect puts its stable of big names up for sale. The plan is to demerge Ranks Hovis McDougall (RHM) by issuing shareholders with an equal number of replacement shares in the new company. However, Tomkins stated that it has received a number of offers for all or parts of the business in the past and would respond appropriately to approaches. The usual suspects - Nestle, Unilever and Hicks Muse Tate (which recently bought Hillsdown Foods) - have been heralded as potential bidders.

Given Tomkins' unhappy status in the City, it is not surprising that news of the demerger has met with little enthusiasm. But perhaps it should be.

Under Tomkins' stewardship RHM has doubled its profits, rejuvenated its flagship brand Hovis and attained an 8 per cent margin that is the envy of many food firms.

"Tomkins' style has been very good for it and much better than the previous RHM management. It has been unfairly slated by the market when, in fact, it has been a good parent," says a management consultant. "It is run in a much more enlightened way than other conglomerates. It doesn't screw its businesses into the ground to extract every penny."

Such praise is hard to come by.

The City had already fallen out of love with conglomerates by the time Tomkins bought RHM for pounds 925m in 1992. It didn't swallow the company's line that food processing was like any other arm of manufacturing, and it doubted its ability to turn around the lacklustre baker.

Tomkins' share price has under-performed for the seven years, and although it has proved the City wrong in terms of its ability to improve and expand the business, it has been under pressure to divest RHM.

After years of battling ill-will, last week it effectively caved in to pressure to offload RHM. Its share price enjoyed a brief rally on Monday, but quickly fell and ended the week at less than its pre-announcement level.

Tomkins has done what the City wanted, but it has not sweetened the affair. The City has responded with: "Too little, too late."

One analyst says: "It is the only thing [Tomkins] could do. Whether it is right is a different matter."

Another, who believes the move is two years too late, argues: "When people work through the numbers, they will find that the share price has been above the value of its constituent businesses."

Analysts value RHM at pounds 1.2bn to pounds 1.5bn, some way short of Tomkins' pounds 1.7bn to pounds 2bn estimate. Venture capitalists are lukewarm: "I would be cautious about getting involved because most of [RHM's] activities are in mature markets," says one.

Given the age of its brands - Hovis dates back to 1886 - and given many of the markets it operates in, "mature" is an appropriate word. Marmalade, suet, stuffing and gravy are hardly the most happening markets. However, this ignores the fact that RHM boasts the market leader in ethnic foods - one of the most vibrant sectors of the business - with Sharwoods. It also overlooks innovations such as cake bars and bites - designed to take advantage of the rampant trend for snacking on the hoof - and RHM's inroads into new areas with the recent acquisition of speciality, frozen and part- baked bread manufacturers. Another crucial development has been the establishment of business partnerships with Marks and Spencer, McDonald's and Pizza Hut to supply ingredients from buns, ketchups and pizza bases to ready meals.

The gloom perennially attached to its parent masks the achievements of RHM's management team under chairman Paul Wilkinson. RHM has attained leadership in three of its four markets - flour, packaged cakes and grocery brands - and is second in the bread business. The flour and bread business is in an appalling state with ridiculously low pricing thanks to supermarkets' cut-throat discounting wars and overcapacity in the market. However, Mr Wilkinson's lot have managed to increase annual sales of Hovis from pounds 80m to pounds 120m and successfully introduce new lines such as white bread and stay-fresh crusty loaves, which "are going brilliantly", according to one of the few Tomkins-friendly analysts. "Wilk- inson is a good strategic motivator and he has done a fine job of turning the company around," he adds.

Revenue from its mature businesses has been put to work funding its new activities and RHM has already restructured itself internally to give it greater focus on innovation. It already has a foothold in the noodles market, which is hailed as the next big eating trend.

RHM has maintained its investment in marketing. Some in the marketing community believe that it is not spending enough, given the crowded media marketplace.

Speculation continues as to who may eventually end up running the business. Tomkins' finance director, Ian Duncan, resigned from the main board last week with the intention of becoming chairman of the separated company, with Mr Wilkinson as his chief executive. There is as much talk about the pair leading a management buyout as there is about break-up bids from trade buyers.

While the City is too churlish about Tomkins to laud the achievements of RHM, Mr Wilkinson's supporters believe the happiest outcome would be one where he gets to prove the worth of the portfolio he has so carefully managed and enhanced.

"Our most valuable assets are our brands, our people and our relationships," says Mr Wilkinson. This could be his chance to show just how valuable they are.

FACTS FROM THE RANK AND FILE

Brands: Hovis, Mother's Pride, Nimble, Bisto, Saxa, Atora, Paxo, Robertson's, Sharwoods.

Bakes 16 million loaves a week.

Has the number one, two and three brands in cake market with Mr Kipling, Cadbury's Chocolate Cakes and Lyons.

Produces 60,000 Cadbury's Mini Rolls an hour.

Has annual sales of pounds 151m to Marks and Spencer, covering celebration cakes, ready meals and desserts.

Sells 750 million burger buns a year to McDonald's.

Supplies pizza bases to more than 1,000 Pizza Hut branches in Europe.