Is it time for BP to be broken up?

By MoneyWeek Editor John Stepek Mar 21, 2006

John Stepek

***Is it time for BP to be broken up?

***Insider dealing taints nearly one in three City takeovers

***RECOMMENDED ARTICLES: Why sugar prices have soared... Which will deliver the best returns - India or China?...

Bidding fever continues to sweep through the UK stock markets, and it shows no sign of abating.

The FTSE 100 pushed through 6,000 points for the first time in five years last week, though it slipped from the session's highs to end at 5,999 on Friday. Airport operator BAA was the latest blue chip to fend off the affections of an unwanted suitor, rejecting an £8.8bn offer from Spain's Grupo Ferrovial.

The takeover boom is certainly making lots of investors rich. But it seems that not all of those investors are making their money honestly…

The Financial Services Authority, which regulates the UK’s financial markets, reckons that insider trading goes on ahead of almost one in three takeover deals being announced.

The FSA said it detected unusual price moves ahead of 29% of FTSE 350 takeover deals conducted between 2000 and 2004.

“The figures…suggest some informed trading was going on,” said a spokesman. And it’s getting worse. “There was a small but statistically significant increase in informed price movements suggesting a deterioration in market cleanliness.”

The FSA says it doesn’t currently have the resources to chase up all the dodgy-looking past deals – the report is more of a barometer to try to keep track of just how bad the problem is.

Of course, in the current market, it’s pretty hard to say which price movements are genuinely suspicious. An investor could be forgiven for buying into the shares of almost any FTSE 100 company just on the off-chance that some debt-laden private equity firm or European predator might decide to snap it up.

Size seems no object – even mobile giant Vodafone was recently subject to press speculation that private equity firms including Apax Partners Worldwide and CVC Capital Partners were planning a £100bn bid for the group.

Of course, a problem with takeovers is that they frequently destroy shareholder value. On the other hand, demergers and spin-offs can often be very successful. BP’s house broker Cazenove last week called for the oil company to break itself up to improve shareholder value. The group reckons that the oil majors would be better off splitting their upstream units (the bit that finds the oil and gets it out of the ground) and their downstream units (the bit that refines the oil and sells the finished products, like petrol).

Cazenove reckons that BP’s shares are trading at a 15% to 20% discount to what they’d be worth if the company was split up.

It might seem a radical step, but John Paul Rathbone on Breakingviews.com approves, suggesting that a break-up would improve management focus and transparency.

“Would Shell have had that reserves problem if its exploration unit had been separate? Maybe not,” he says. And he points out that “splitting up did wonders for the old British Gas. Since BG demerged from Lattice, shares in the oil and gas firm have almost quadrupled.”

Will the idea be taken up in the near future? It's hard to say, though Cazenove reckons that the 'conglomerate discount' is of 'growing concern for top management.' In any case, it all adds up to another good reason – on top of high oil prices - to hang onto your oil stocks.

Subscribers can read more on why break-ups and spin-offs are usually more successful at creating shareholder value than mergers and acquisitions on our website, by clicking here: Ten firms heading for a value-boosting demerger

And if you’re not yet a subscriber, you can get access to all the content on the MoneyWeek website and sign up for a three-week free trial of the magazine, just by clicking here: Sign up for a three-week free trial of MoneyWeek.

Turning to the stock markets…

The FTSE 100 rose 6 points to 5,999. Life insurers led the gains amid further bid speculation. Legal & General reported a 43% jump in operating profits to £1.09bn, up from £745m in 2004. It climbed 7.09% to 143 pence. Prudential was up 7.09% to close at 672 pence. For a full market report, see: London market close

On the continent, the Paris CAC 40 rose 15 points to 5,141, while the German DAX rose 15 points to close at 5,882.

Across the Atlantic, US stocks were higher. Investor's concerns over a possible rise in interest rates were soothed by data showing steady economic growth. The Dow Jones rose 26.41 points to close at 11,279, while the S&P 500 rose 1.92 points to 1,307.25. The tech-heavy Nasdaq 6.92 points higher at 2,306.

In Asian trading hours, oil was lower. It fell in New York, to trade at around $62.70 a barrel. Brent crude was lower, traded at around $62.50. Meanwhile, spot gold was trading at around $555 an ounce.

In Asian stock markets, the Nikkei 225 rose 285 points to 16,624.

And here in the UK, investors in Prudential will today be given the opportunity to quiz senior management on their decision to reject a £17bn bid at the end of last week from rival Aviva, owner of Norwich Union. Aviva has said that it will only go ahead with its proposed £17 billion offer if the bid is recommended by Prudentials board.

And our two recommended articles for today...

Why sugar prices have soared
- Sugar prices rose by more than 45 times between 1966 and 1974. Investment legend Jim Rogers explains why the price soared - and also why the boom gave way to a massive bear market. But now sugar is making a comeback. To find the simple reason behind its recent surge, see: Why sugar prices have soared

Which will deliver the best returns - India or China?
- A note from GaveKal Research has dispelled some of the myths that have sprung up about the economic performance of both India and China, says Martin Spring in his On Target newsletter. But which of the two will provide the best returns for investors? To find out, click here: Which will deliver the best returns - India or China?

Published in Stock markets | More articles by John Stepek

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