Musgrave gears up for full control of Budgens

The Cork-based retailing group Musgrave is gearing up to buy the 55 per cent of the British supermarket group Budgens that it does not own, a move that would cost Musgrave at least €230 million based on the current Budgens share price.

Musgrave currently owns 28 per cent of Budgens but has the option to bring its stake up to 45 per cent by converting loan stock. This leaves 123 million Budgens shares held by other investors and these are currently worth £143 million sterling (€230 million) at yesterday's price of 116p sterling.

In a statement to the stock exchange, Budgens simply said it had received an approach from Musgrave that may or may not lead to an offer. Efforts to contact Musgrave chief executive Mr Seamus Scally at the group's Cork head office were unsuccessful.

Musgrave first bought into Budgens in August 2000 when it acquired the 28 per cent equity stake and convertible loan stock held by the German group Rewe for €147 million. At the time, Musgrave said it would not make a bid without the agreement of the Budgens board before September 2001.

Although that restriction has now expired, market sources believe it is unlikely that Musgrave will now bid for Budgens without the support of its board. Mr Scally and another Musgrave director Mr Eoin McGettigan sit on the Budgens board and are thought to have played a prominent role in Budgens's diversification into the franchised store business model pioneered by Musgrave in Ireland through its SuperValu and Centra outlets.

Budgens is about one-third the size of Musgrave in terms of turnover, with sales in the year to April 2001 of £477 million sterling (€770 million) and pre-tax profits of £17.2 million (€28 million).

In the half-year to November 2001, the group increased its turnover by more than 9 per cent to £279.3 million (€450 million) while pre-tax profits were up 22 per cent to £10.3 million (€16.6 million). Musgrave had sales last year of just over €2 billion with pre-tax profits of €34.3 million. It has recently revealed plans by its franchises to invest €150 million on new stores and redevelopment of existing stores.

Currently the group has more than 170 SuperValu stores and about 300 Centra convenience stores in the Republic and about 20 SuperValu stores in Northern Ireland. In contrast, Budgens has a total of 210 owned and franchised stores in the midlands and south of England and has 6,000 staff.

If Musgrave does go ahead with a €230 million-plus offer for the balance of Budgens, it will inevitably focus attention on how the Cork group will finance the biggest acquisition in its history. As a private company, Musgrave is not in a position to offer its own shares in payment so any offer will be all-cash.

At the end of 2000, the most recent accounts available, Musgrave had net debt of €230 million, mainly due to the initial investment in Budgens. That represented gearing of 150 per cent although interest was covered 5.2 times by operating profits.

That balance sheet has almost certainly improved in 2001 given the strength of Musgrave's cash flow, but paying more than €230 million for the balance of Budgens would inevitably stretch the balance sheet without some innovative financial engineering.

Musgrave is a family company, owned by the extended Musgrave family. Chairman Mr Hugh Mackeown has always said it intends to remain private and there are no plans for a stock market listing.

When he announced the 2000 results in August 2001, Mr Mackeown did say that funding was tight but repeated the intention to remain private.

It remains to be seen whether a bid for the outstanding shares in Budgens will lead the company to review that position.