Heiton investors advised to take Grafton stock

Heiton shareholders have been advised to take as much Grafton stock as they can under Grafton's proposed takeover of its smaller rival.

Merrion Stockbrokers analyst Mr John Mattimoe said yesterday that Heiton shareholders should accept Grafton's proposal at €6.606 per share because it represents a "fair reward".

This is particularly the case, he noted, because the share element of Grafton's approach will allow Heiton shareholders to participate in the benefits of a combination of the two companies.

Mr Mattimoe pointed to the Heiton board's recommendation for the proposed offer as a reason for accepting. Grafton's 29 per cent holding in Heiton will also act as a disincentive for any competing bidder, he suggested.

Grafton said last Friday that it had reached agreement with the Heiton board on an offer based on €2.64 in cash and 0.58997 of a Grafton share.

This 40/60 split represents a 27 per cent premium over Heiton's closing price the day before Grafton's takeover interest publicly emerged in June.

Heiton's shares gained 5.5 per cent yesterday to close at €6.33, on minimal volume. Grafton meanwhile fell two cents to €6.74.

Before last Friday, analysts had estimated that Grafton could have drawn benefits from a takeover at €7-€7.50 per share. This underlines the appeal of the current proposal for Grafton shareholders, Mr Mattimoe said.

He pointed out that the appreciation in Grafton's share price since mid-June means that the firm will actually issue the same amount of its own shares under the latest proposal as it would have under its earlier €6.35 approach.

Grafton should be able to strip out €10 million in annual cost savings under the deal, Mr Mattimoe believes. If this could occur in 2005, the takeover could boost Grafton's earnings per share by 14.7 per cent to 67.1 cents, he said.

NCB analyst Mr John Sheehan, said Grafton's acquisition record offered some "comfort" on the integration front. He expects Grafton to generate at least €30 million through property sales when the deal is complete.

Mr Sheehan says Grafton is likely to "aggressively" grow the DIY side of an enlarged business as housing construction eases off.

"The scope to extract cost savings/synergies will maintain earnings momentum in the event of a market slowdown," he noted.