Business review
GUS: progress in 2006
The year under review has seen further major steps in the transformation of GUS, with significant disposals, acquisitions and organic investment. In March 2006, the Board of GUS announced plans for the demerger of our two remaining businesses, Argos Retail Group and Experian. This will enable all our existing shareholders to continue to benefit directly from an investment in both these attractive businesses.
We have during the year completed the demerger of Burberry and the disposals of Lewis and Wehkamp, leaving GUS now focused entirely on Argos Retail Group (ARG) and Experian. In May 2005, we sold our remaining 50% stake in Lewis, raising £140m; in January 2006, we sold Wehkamp, our last home shopping business, for £210m; and in December 2005, we carried out the demerger of our remaining 65% stake in Burberry Group plc. Combined, these businesses contributed about one-quarter of Benchmark PBT in the year to 31 March 2005.
We have invested over £800m in acquiring businesses during the year. Most of this has been in Experian in areas such as Interactive (including LowerMyBills.com and PriceGrabber.com), in marketing database solutions (ClarityBlue) and further credit bureaux affiliates. Argos also acquired 33 Index stores at a cost of £44m. All these acquisitions are trading well.
We have continued to invest both capital and revenue during the year in ARG and Experian. At ARG, investments were made in new stores, warehouses and ranges. Experian continues to invest in new products, regions and infrastructure. Capital expenditure in the year to 31 March 2006 was about £360m for continuing operations – a level that is expected broadly to repeat in the current year.
As announced in March 2006, the Board of GUS proposes that ARG and Experian should be separated by means of a demerger with both businesses becoming independently listed on the London Stock Exchange. We have so far provided the following information:
Timing: We are aiming to complete the demerger in October 2006, subject to shareholder approval.
Debt allocation: At 31 March 2006, GUS had net debt of £2.0bn. The Board of GUS believes that Experian, as an independent company, should have net debt of about £1.0bn after the proposed equity issue. This, it believes, would be consistent with a BBB+/Baa1 credit rating. ARG will be allocated net debt of about £200m, in addition to its substantial leasehold obligations.
New share issue in Experian: Subject to any major changes in our financing requirements prior to the demerger, the Board now expects to offer new shares in Experian at the time of the demerger.
Dividend policy: The dividend policy of Experian and ARG is a matter for each Board following the demerger. However, at this stage, it is anticipated that Experian will have a cover of no less than three times and ARG a cover of no less than two times.
Outstanding bonds: As announced on 22 May 2006, we have proposed certain amendments to the terms and conditions of our outstanding bonds.
Tax rates: Subject to any changes in legislation, it is expected that the effective tax rate based on Benchmark PBT will be in the region of 30% for ARG and in the low twenties for Experian, reflecting its more international business mix.
Reporting currency: Experian will report in US dollars post separation, given that the majority of its profit comes from the US. Nearly two-thirds of Experian’s EBIT in 2006 was generated by Experian North America.
Sector classification: It is expected that, following discussions with the FTSE, ARG will be classified in the General Retailers sector and Experian in the Support Services sector.
We will continue to update the market accordingly as further decisions are made.
