Struggling BICC ripe for demerger

The Investment Column

BICC is in a mess. Both of its two core businesses, power cables and construction, are inherently unattractive. Despite reasonable market positions, price competition from rivals and falling demand ahead of utility privatisations is squeezing already wafer-thin margins. Investors have had a rotten deal. A rights issue at 270p a share in September - BICC's shares, down 7.5p are now 162.5p - was swiftly followed in May by a profits warning. And Alan Jones, new broom chief executive, has failed to be radical enough to satisfy the City.

Since his appointment in 1995, BICC's shares have underperformed the market by 70 per cent. BICC's problems are evidenced in yesterday's half- year figures. Underlying profits for the six months to June fell 13 per cent to pounds 55m on turnover 6 per cent down. Though better contract picking helped Balfour Beatty, BICC's construction arm, improve profits from pounds 1m to pounds 15m, the European power cables business was dire. Cables profits almost halved to pounds 28m, hit by reduced infrastructure spending ahead of monetary union, falling demand in the key Italian market ahead of the telecoms privatisation and competition in Germany.

What's more, on NatWest Securities forecasts of 11.3p earnings in the full year, BICC is heading for yet another uncovered dividend on a likely maintained 12.4p full-year payout. Though BICC has cash, an uncovered dividend never looks good. The group should cut its dividend again, but that would take guts after the rights issue.

So what should Mr Jones do? After more than two years as chief executive, surely it is time for something brave. The planned chop of 350 jobs in Italy hardly fits that bill. More interesting is the suggestion that something is afoot in German cable.

Though Mr Jones says nothing more than the German business is to "reposition", and that with 39 per cent gearing, the balance sheet is not constrained, observers reckon BICC is about to cuddle up to one of its big power cable competitors - such as Siemens of Germany or Alcatel Alsthom of France.

What is likely is a limited joint venture in Germany. But if BICC really wants to help itself, it needs a big, pan-European deal. Such a joint venture with, say, Siemens would allow BICC to reap huge economies of scale, close loss-making plants and give it access to Siemens' strong brand, distribution and marketing.

But that alone is not enough. To fully realise value, BICC needs to demerge the construction business. Mr Jones' argument that the group needs the cash of cable to strike good construction deals is weak. What a demerger would do, by motivating management and improving performance, is expose Balfour to a potential bidder. But even excluding bid speculation, NatWest believes the group's break-up value alone would be 100p above the present value at 260p a share, even after stripping out debt and convertible preference shares. There is potential in BICC, but to realise it will take bold steps.