Grafton bid for Heiton not seen as inevitability

A prelude to a takeover bid, or merely an investment? When Grafton, the Woodies DIY group, purchased a 4.9 per cent stake in its rival, Heiton Holdings, the Atlantic Homecare company, it said it was for "investment purposes". When it purchased a 24.93 per cent stake in British Dredging, a British publicly quoted builders' merchants company, it said it was a "strategic investment".

Yet Grafton went on to increase this holding to 29.97 per cent and subsequently made a successful takeover bid. However, it does not necessarily follow that a takeover bid for Heiton is a certainty.

Grafton, for example, had built up a "strategic" 3 per cent stake in Erith, a British building supplies group, only to sell that stake at a windfall profit of more than £500,000 (#635,000), when Erith had an agreed £55.4 million (#70.3 million) bid.

Nevertheless, a get-together of Grafton and Heiton would make a lot of sense. Ironically, when a merger of the two groups was first suggested in this column three years ago, Grafton's market capitalisation was almost twice Heiton's. However, Grafton has been expanding at a faster rate and is now almost three times bigger. Now Heiton would have to accept a very junior status in the event of a takeover.

While the Grafton management team is not confrontational, if it came to shove it would have a lot of support from the shareholders who matter - the institutions who can see the benefits which could flow from such a get-together. Heiton's directors control only 1.4 per cent of the company but the six largest shareholders control 35.9 per cent, according to the 1998 annual accounts.

The list is headed by Allied Irish Banks plc and its subsidiaries with 11.2 per cent, followed by Scottish Provident with 5.8 per cent, Irish Life Investment Managers 5.6 per cent, Bank of Ireland Asset Management 4.5 per cent, Eureko Asset Management 4.5 per cent and Goldman, Sachs & Co 4.3 per cent.

The Grafton directors have much greater control over their company with an 11.6 per cent holdings, according to the last annual report (1997) - the executive chairman, Mr Michael Chadwick, owns the bulk of these.

However, institutional shareholders control the company. The nine largest have a 58.83 per cent shareholding. The largest is Bank of Ireland nominees with 22.44 per cent, followed by Ulster Bank Markets (Nominees) 7.14 per cent, Irish Life Assurance Company 5.02 per cent, Ulster Bank Markets (Nominees) STI 4.73 per cent, Scottish Provident (Irish Holdings) 4.65 per cent, AIB Custodial Nominees Account 2 4.38 per cent, ESB Superannuation Fund 4.05 per cent, Norwich Union Life Insurance Ireland 3.33 per cent and Nutraco Nominees 3.09 per cent.

Irish Life, Scottish Provident and AIB have significant holdings in each company. They could play a pivotal role in any nudging which may be required to amalgamate the companies.

Forward looking institutions are now playing a more positive role in pushing boards of look-a-likes together so as to gain benefits of scale. It was institutional shareholders who pushed European Leisure and Allied Leisure together in Britain.

However, both Grafton and Heiton have had their own form of rationalisation and have been expanding both organically and by acquisition. This is reflected in their results. Grafton's sales have risen from #243.9 million in 1996 to #427.5 million in 1998. Pre-tax profit has increased from #19.7 million to #28.2 million while, reflecting real growth, earnings per share have grown from 95.2 cents to 149.0 cents.

Heiton's sales rose from #178.3 million in the year ended April 30th, 1997, to an estimated #260 million in 1998/9. Pretax profit rose from #10.9 million to an estimated #15.5 million while earnings per share could be around 23 cents this year, compared with 15.6 cents in 1996/7.

That, and the optimistic projections for the immediate future, should not disguise the need, and the benefits, that can be derived from rationalisation. Heiton claims to be number one in builders merchants and steel. Grafton is not far behind in builders merchants. Grafton is the largest in DIY while Heiton is number two but its share will increase when it opens its centre in Blanchardstown next month.

Between them they have between 40 per cent and 44 per cent of the Republic's builders' merchants market and that could pose a problem with the Competition Authority. However, that authority would have to take into account the British companies which displayed a renewed interest in the Irish market. Wolseley, the British materials firm, acquired the midland-based merchanting group, Heatmerchants, for an estimated £20 million (#25.4 million). Wolseley is expansionist and last year paid a substantial premium for Hall, a general builders merchant, and is likely to carve a large niche in the Irish market. Further rationalisation of the Irish market is inevitable.