GRAFTON, the Woodie's DIY Group, has acquired a 24.93 per cent stake in British Dredging, a British publicly quoted builders merchants company, in what could be a prelude to a takeover bid. In a separate development, Grafton has also announced the takeover of FKS Builders Merchants, another building materials group, for £2.6 million sterling.

Grafton has described the acquisition of the stake in British Dredging as a "strategic" investment. It is now the largest individual shareholder in British Dredging following the purchase of the minority holding from Redbird Holdings SA, for £6.33 million sterling, or 145p sterling per share. That was the highest level for many years and well above the market price of 134.5p, when the purchase was made. The shares have since risen above 150p.

Asked if Grafton would mount a bid for the remaining shares, executive chairman, Mr Michael Chadwick, said "we don't comment on developments in public companies". Neither would he comment on whether discussions had taken place with the British Dredging board or whether Grafton would be prepared to undertake a hostile takeover.

Mr Michael Brown, chairman of British Dredging which employs 515 people from a network of outlets in the West Midlands and Wales, said he could not "speculate on Grafton's aims" but he has "been trying to arrange a meeting to see what sort of relationship the two companies can have. Asked about board representation - Redbird had no representation - he said that would be up to the board but suggested that that might represent a conflict of interest.

Explaining the acquisition, Mr Chadwick said "this investment gives us a strategic stake in a UK builders merchants that is closely aligned to Grafton. Grafton has been expanding its position in the UK during the past three years and now has annualised sales in excess of £80 million in the UK".

The British Dredging board, with less than a 1 per cent shareholding, is not in a strong position to defend a bid, should one emerge. The largest shareholders, apart from Grafton, are M&G (with 11 per cent), RMC (9 per cent), Mercury Asset Management (under 10 per cent) and Martin Currie (under 10 per cent). So far, none of these investors has been contacted by Grafton, according to market sources.

British Dredging has 1,850 shareholders and has its headquarters in Cardiff. It manufactures and supplies concrete paving blocks and is also involved in ship repairing, marine dredging and the supply of sand and gravel. It has joint 50/50 dredging company with RMC.

British Dredging has had a cyclical record in line with the British building industry but last year increased its pretax profits from £1.9 million to £2.1 million, on net assets of £24.2 million. Grafton's purchase values the group at £25 million which is a high value based on the historic profit figures. However, British Dredging could be in a strong recovery phase as the chairman has already stated he was very bullish about the future.

Grafton has taken a minority stake in the past which did not lead to a takeover. However, that amounted to just 3 per cent of Erith. The investment was made in 1990 and sold at a £0.5 million profit in 1995.

FKS, the other acquisition, is located in Newbury. It had an operating profit of £188,000 sterling on turnover of £6.4 million in 1996. This follows the recent acquisition of Hendricks Lovell in Hayes, West London, and Wiltshire Builders Supplies in Swindon.