Grafton shows its hand at last

It has been a long wait for Heiton, which for five years had been operating with a potential predator in its midst.

When Grafton first took a 4.9 per cent stake in its smaller rival in March 1999, the market immediately pounced on the notion that a takeover was imminent.

Talk of a union between the two groups (albeit with Heiton in the weaker position) continued to circulate for the next two years or so, while Grafton quietly worked on building its holding up around 24 per cent.

In recent times, however, observers have been persuaded (wrongly as it happens) that Grafton's holding in Heiton was defensive rather than offensive in nature. The idea, commentators accepted, was to give Grafton the power to block a foreign player trying to enter the market by acquiring Heiton.

This acceptance was rattled in mid-May, when it emerged that Grafton had swooped for a 5 per cent stake in Heiton in just one day. Suddenly, a takeover was again an option. And 10 days later, it became a firmer possibility when Grafton, advised by AIB Corporate Finance, made its first verbal contact with Heiton, which is taking advice from IBI.

Grafton executive chairman Mr Michael Chadwick said yesterday that a full acquisition of Heiton had always been in the background. "We felt that taking the shareholding gave us the option," he said.

The timing of the move will be seen as surprising by some, with Grafton repeatedly pointing to the UK as its primary target for growth over the past few years.

In 2003, the firm made a €144 million purchase of Jackson's Building Centres, which propelled it to an 8 per cent share of the UK market.

The takeover strategy may make more sense when placed in the context of the imminent sale of Brooks, the third-largest builders' merchant in the Irish market

If Heiton was to be successful in buying the firm, which has a 6 per cent share of the Irish merchanting market, the combined entity would represent a staunch challenge to Grafton's Irish business.

The ability to block such a deal may hold some appeal for the larger firm.

It could indeed be the case that even the remotest possibility of Heiton being acquired in the near term might make it a less attractive buyer for Brooks, which will be seeking a glitch-free sale.

It is also possible that Mr Chadwick sees Heiton chief executive Mr Leo Martin as an able chief executive for an enlarged Grafton group.

Mr Chadwick is coming under increasing pressure to separate the roles of chief executive and chairman under new corporate governance rules.

Based on a 2002 analysis of the market, the builders' merchanting sector is worth some €2.6 billion in the Republic, with Grafton holding a 9 per cent share of this. If combined with Heiton, this would rise to 19 per cent.

On the DIY side, one estimate suggests that Grafton has about 9 per cent of a €2 billion market, while Heiton has 7.5 per cent.

This market is on the point of a shake-up, with Dairygold about to spend €30 million developing a new chain of branded DIY stores.

In the UK, Grafton turns over some €2.5 billion in comparison to Heiton's €80 million or so.