Grafton buys UK builders suppliers for €144.2m

Shares in building materials group, Grafton, slid by almost 13 per cent yesterday after the firm announced an ambitious UK acquisition and rights issue. Grafton has agreed to acquire Jacksons Building Centres, the UK's largest regional builders suppliers, for €144.2 million. It will partly fund the acquisition through a €70.6 million rights issue, with an additional €25.6 million covered by loan notes and the remainder by bank debt.

Grafton has agreed to acquire Jacksons Building Centres, the UK's largest regional builders suppliers, for €144.2 million. It will partly fund the acquisition through a €70.6 million rights issue, with an additional €25.6 million covered by loan notes and the remainder by bank debt.

Grafton closed at €2.80, down 40 cents in a generally weaker market. Analysts said the stock had been hit by concerns about the price to be paid for Jacksons, which equates to about 15 times' earnings. The market was also unsure on the merits of the rights issue, Grafton's first use of such a funding mechanism.

Grafton executive chairman Mr Michael Chadwick said it was not unusual for the firm to pay a multiple of 15 times earnings in acquisitions, signalling the £6.5 million (€9.8 million) annual savings it expects to achieve when the Lincoln-based Jacksons is fully integrated into existing UK operations.

Finance director Mr Colm Ó Nualláin said Grafton had "reluctantly" decided to go to the market but that its desire to make further acquisitions had prompted the move.

The rights issue will be made at €2 per share, a discount of 37.5 per cent on Monday's closing price. It will be fully underwritten by Goodbody Stockbrokers.

The Jacksons acquisition will bring Grafton's UK store network to 245, allowing the firm to increase its stake in the market to 8 per cent from 6 per cent and maintain its position as fourth-largest UK merchanting group.

Reaction to the deal was sufficiently strong to reduce the impact of an extremely positive trading update, in which Grafton signalled pre-tax profits for 2002 of "no less than €80 million", up almost 20 per cent on the previous year. Adjusted earnings per share are estimated to have grown from 34.1 cents to 39.1 cents. Growth was flat in the Republic and "strong" in the UK, says the statement.

Davy analyst Mr Florence O'Donoghue described the results as "fabulous" when placed against a generally sluggish business backdrop. The results mark Grafton's 19th year of uninterrupted positive growth. It predicted that 2003 would be "a year of further development and profitable growth", particularly in the UK.

More than 70 per cent of the company's estimated €1.1 billion turnover came from the UK in 2002. A "return to growth" in the Republic is unlikely this year, the company believes.

It is understood that Grafton was not the highest bidder for Jacksons, a family-owned business spanning 18 outlets with an average turnover of £7 million. Last year, the company made pre-tax profits of £6.1 million.

Company managing director Mr Normal Kilroy said the offer had been successful largely because of Grafton's past history of carefully integrating acquisitions with its existing operations.

Most of Jacksons is held by two families related to its founder, with venture-capital company 3i a 20 per cent shareholder.