Musgrave signals intent for push into Britain with equity stake in Budgens

The retailing group Musgrave is set for a major move into the British grocery market after buying an effective 43.5 per cent stake in the British regional multiple chain Budgens for £115.5 million. Musgrave, whose Supervalu and Centra franchised stores control about a quarter of the grocery market in the Republic, is initially buying a 28 per cent stake in Budgens from the German food distributor REWE Trading. But Musgrave has also bought Budgens convertible loan stock from REWE which will increase its stake to 43.5 per cent of the enlarged group.

Musgrave finance director Mr Michael Walsh said that Musgrave can convert the Budgens loan stock into ordinary shares any September between now and 2003 but had given a commitment to the Budgens board not to do so this September.

From September next year, Musgrave can convert the loan stock and take its stake in Budgens to 43.5 per cent, but the Irish group has given a commitment not to make a bid for Budgens without the agreement of the board, unless Budgens receives a bid from a third party.

"From September next year our options are open, we're not ruling anything in or anything out," said Mr Walsh when asked if Musgrave intends to make a bid once the restrictions on converting the loan stock are removed. Industry analysts believe, however, that Musgrave is unlikely to have paid £115 million for its effective 43.5 per cent in Budgens if it did not intend to take control at some stage.

In the meantime, however, Musgrave managing director Mr Seamus Scally and the chief executive of Supervalu-Centra Mr Eoin McGettigan, are joining the Budgens board while Musgrave executives are likely to play a substantial role in Budgens's planned diversification into franchised stores. Currently, Budgens owns its 208 stories which are concentrated in greater London and the south of England.

This is Musgrave's first move into British market but the group is already established in Northern Ireland where it has 21 franchised stores with a 11 per cent share of the local market. It has around 480 Supervalu and Centra stores stores in the Republic where it accounts for 25 per cent of the market.

Budgens is substantially smaller than Musgrave with turnover last year of £451 million sterling (£559 million) compared to Musgrave's £1.4 billion sales. The British group, however, is a highly profitable operation and produced pre-tax profits of £14.6 million (£18 million) compared to Musgrave's £26 million in 1999.

Unlike Musgrave, which is franchise-based, Budgens owns its 208 stores which are which are similar in size to Musgrave's Supervalu supermarket and Centra convenience store outlets. But Mr Scally said that Budgens is currently experimenting with a move into franchised stores. "If this is successful then Budgens plans to have 50 franchised stores within the next two years."

Chairman Mr Hugh Mackeown said: "The Irish market is now maturing and although it will, of course, continue to be Musgrave's core business, our current 25 per cent market share limits the scope of added expansion. Budgens is a very successful company."

Mr Scally said that the independent retail market in the UK is currently small and accounts for only 9 per cent of the total market compared to 25 per cent the Republic. "That's been the result of the uncontrolled development of the superstores which has meant that shoppers have little in between the superstores and symbol stores. Budgens is one of the few filling that gap," he said.'

As well as diversifying into franchised stores, Mr Scally said that Budgens will continue opening five or six of its own stores each year. He said, however, that if the move into franchising is successful then Budgens can expand at a far faster rate as the franchisees will be providing the finance for the franchised stores rather than the company.

The £115 million being paid for the REWE stake will have a major impact on Musgrave's balance sheet. Mr Walsh said that end-2000 gearing is likely to be in the order of 105 per cent but will fall well below 100 per cent the following year. "We have very strong cash-flow and we're comfortable with the gearing," he said.

Budgens shares rose by 9 1/4p to 79 1/4p yesterday in response to the move by Musgrave, with the market adopting the position that Musgrave will bid for the remainder of Budgens once the current restrictions expire in a year's time.

The prospect of taking full control of Budgens will inevitably lead to speculation that Musgrave may at some stage rethink its attitude towards floating the company on the stock market.

Musgrave - family-controlled by the extended Musgrave family - has been hostile in the past to the very concept of going public. But some sources believe that buying out the remaining shares in Musgrave might force a rethink of that independence.