Grafton builds up 4.9% Heiton Holdings' stake

A major rationalisation of the Irish building materials industry may be in prospect following the move by Grafton to build up a 4.9 per cent stake in its smaller rival, Heiton Holdings.

While Grafton's chairman, Mr Michael Chadwick, would only say that the purchase of 2.3 million Heiton shares at a cost of #5.5 million (£4.3 million) is "for investment purposes", industry sources believe that Grafton may be laying the foundation for a full bid for Heiton, which is currently valued in the market at #110 million (£87 million).

In contrast, Grafton, whose shares have risen by almost 20 per cent in the past year, has a market capitalisation of #300 million (£236 million). While a spokesman for Heiton said there had been no communication between the two companies, the view in the market is that Grafton would like to make an agreed offer for Heiton - probably involving a share swap - to try and ensure that no third party emerges with a counter-offer. A merger between the two groups would be the ideal scenario, said market sources.

However, an offer from a third party is perfectly conceivable, as a number of British building materials group have already cast their eye over the Irish market, which is booming as a result of the unprecedented growth in the building industry.

Already, the British building materials group Wolseley has taken a toehold in the Irish market, with the acquisition of the midlands-based merchanting group Heatmerchants for an estimated £20 million. Market sources believe that Heatmerchants - with a turnover of less than £33 million last year - is likely to be simply the forerunner of a more active expansion in Ireland by Wolseley.

"Taking out Heiton would fit the bill for Wolseley perfectly and maybe that's why Grafton has made a move," said one source.

Whatever the outcome, it is likely that, given the drift away from smaller companies, institutional investors would relish a bid for Heiton at a reasonable price, whether it is a cash offer from a British group like Wolseley or a cash/paper offer from the likes of Grafton. Both groups have common shareholders, mainly drawn from the usual grouping of Irish institutions, including BIAM, Scottish Provident, Irish Life, Norwich Union and UBIM.

One thing seems certain. Any bidder for Heiton will probably have to pitch its offer well above the current price in the market of #2.38. To have any chance of success, it is likely that a bidder would have to pitch its offer for Heiton in excess of #130 million (£100 million). That would suggest a price of at least #2.80, compared to the #2.38 in the market.

Heiton is, in effect, a smaller version of Grafton. In the year to April 1998, the group had sales of £165 million and pre-tax profits of £11 million.

A major expansion in the 199899 financial year is likely to generate strong growth and Davy Stockbrokers expects sales in the year to April 1999 of £209 million with pre-tax profits of £12.3 million.

Heiton's business involves the Heiton builders merchants/steel and Buckley's timber operations, as well as the Sam Hire equipment hire and Atlantic Homecare DIY operations. In the past year, Heiton was involved in a major expansion of its British operations with the £23 million acquisition of the British merchanting group Cooper Clarke. It also acquired the Carlow building supplies business, Gillespie, for £1.3 million.

In contrast, Grafton had sales in the year to December 1998 of £337 million and pre-tax profits of £22.2 million. Grafton operates as Chadwicks builders providers, CPI concrete products, Euromix and Woodies DIY and in the UK under the Buildbase, Plumbase and Macnaughton Blair banners.

Like Heiton, Grafton has been active in UK acquisitions in the past year, paying £42 million for the British Dredging concrete blocks, sand and gravel business, and over £10 million for two small builders' merchants, AR Hendricks and Deben.