Pension complexities behind £28m demerger bill

Tarmac had to stump up £28 million to cover the cost of the demerger of the aggregates and construction businesses. Unforeseen legal complexities in splitting the pension funds sent costs soaring.

Chris Bunker, finance director, described the pension funds as "mature", with a lot of pensioners in schemes set up by firms prior to being bought by Tarmac. "It was important to get it right," Bunker said.

City analysts were puzzled over why Tarmac's demerger was difficult. Asked what the problems were, Bunker said: "One issue was the capital structure to give each of the two companies an adequate capital base, the other was the guarantees that old Tarmac had to give for the new construction companies."

Tarmac's balance sheet (year-end 31 December 1998) showed a net debt of £320 million at the year-end but a £40 million interest charge. At an interest rate of 9 per cent on borrowings, the annual interest charge points to an average debt of £450 million. A contractor's debt figure typically peaks at the mid-year before being pulled back prior to the year-end.

Mike Betts, analyst with JP Morgan, said: "In the demerger, Carillion couldn't be left with a large interest bill, so it was floated with no average debt for the year." Carillion's debt level is typically £100-150 million greater at the mid-year than at the year-end, he noted, so with Tarmac's funds being juggled to allow Carillion to float debt-free in July, it should end the year with a substantial cash balance - Betts suggested a figure of £150 million.

The City has questioned the need for Tarmac to be so generous, given that Carillion has walked away with several assets tucked away in its pocket - its half-share in plant hire business Maxxiom, plus PFI equity and property. In total, they provide Carillion with a £40-50 million 'war chest.'

Two months after the demerger, Tarmac's bonds and guarantees to Carillion have fallen rapidly, from £210 million to £80 million.

Tarmac group's past opulence is fading - the famous helicopter made £310,000. "We're well rid of it," said Harrison. "It was an inefficient way of travelling around the UK."

In addition, the former headquarters at Hilton Hall is on the market at £2 million. A former nunnery, the splendid country retreat was the historic home of the Vernon family, local steel magnates. It was extensively refurbished by Tarmac.