Smiths Group: new boss must engineer long-delayed spin-off

Engineering group Smiths’ efforts to break itself up have gone nowhere fast, just like a song title of the namesake rock band. Over the past decade, attempts by successive bosses to split off the medical division stalled. But the board remains committed to the separation, it said on Tuesday as it unexpectedly installed a new chief executive. The share price, having factored in hopes of a narrowing conglomerate discount, hardly moved.

New boss Paul Keel is a Harvard Business School alumnus who previously worked for conglomerate 3M in the UK and US. His task is to lead the group in what it optimistically describes as its next growth phase. To be fair, investors did not do so badly under Andy Reynolds Smith, chief executive since 2015. The share price rose by more than a half, more than three times as much as the FTSE 100.

But shares have fallen a tenth in the past three years. Many shareholders were unimpressed by the proposed terms of an abortive tie-up in 2018 between the medical division and US-listed ICU Medical.

Another bidder could yet emerge, but it is more likely that the medical division will be spun off and listed. Citi estimates its enterprise value at £2.7bn, about 15 times 2022 ebitda, reflecting a discount to faster-growing European peers. That would leave the remaining businesses trading on a lowly multiple of under 10, ripe for revaluation. Its sum-of-the-parts calculation suggests a 22 per cent potential upside.

Any further dismantling of the portfolio structure is unlikely without external intervention. That is not just because the remaining industrial businesses form a reasonably coherent group. The company has stuck to its belief that the merits of pure play businesses are overblown, even as activists have forced conglomerates across Europe to break themselves up.

Chair Sir George Buckley, a former chief executive of 3M, has described himself as a “conglomerate lover”. That deeply unfashionable sentiment — coupled with the delays to offloading the medical division — makes it all the more important that the new boss pursues a focused strategy.