Asda shares soar on hopes of rival to Kingfisher deal

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The Independent Online
SHARES IN Asda soared yesterday as the City speculated that the supermarket group's proposed pounds 18bn merger with Kingfisher might trigger a rival offer.

Asda shares rose 22.25p to 198.75p, above the 198p implied level of the Kingfisher all-share deal, with analysts suggesting that overseas retailers such as Wal-Mart of the US and Carrefour of France might be interested.

Paul Smiddy, food retail analyst at Credit Lyonnais, said: "If I was an Asda shareholder I wouldn't be that happy. They (Kingfisher) are getting Asda on the cheap with an exit multiple of 20."

Under the terms of the deal, Asda shareholders will receive 0.2263 Kingfisher shares for every Asda share held. This leaves Kingfisher shareholders controlling two-thirds of the stock and Asda investors holding the remaining third. Based on Kingfisher's closing price of 875p on Thursday, the deal implies a price of 198p per Asda share, valuing the business at pounds 6bn.

Another analyst said the deal made Asda look "stunningly cheap," with Kingfisher buying a huge cash-generating machine at a discount to the market multiple.

But although some analysts were critical, the deal was broadly welcomed in the City.Analysts responded to the strategy of creating a larger pan-European retailing force. The consensus was that the merger could lead to annual cost savings of up to pounds 100m. The synergies would come mainly from some buying gains, lower distribution costs and some cost savings at head office level.

However, both companies said there would not be significant redundancies and that Asda would retain its head office in Leeds. Kingfisher's head office in central London is likely to be the headquarters of the enlarged group.

Jonathan Pritchard, food retailing analyst at Morgan Stanley, said: "There are buying benefits but they are relatively small. This is really about `Wal-Marting' Kingfisher. It creates a solid cash-generative grocery business at the heart of the enlarged group. It give Kingfisher a defensive, less cyclical element."

Kingfisher has been on the lookout for a major deal ever since its initial talks with Asda collapsed last May. Sir Geoff Mulcahy, its chief executive, has already struck a series of deals in Europe with the takeover of the Darty electricals business in France and the merger of B&Q with Castorama of France last year. He has also expanded the electricals business into Poland and Germany while taking B&Q to the Far East.

But recently the spectre of Wal-Mart has loomed large, with persistent reports that the US giant was keen on expanding in Britain. Woolworths is already planning to open a Big W expanded store in Edinburgh in June which will include a Burger King branch and a Peacocks clothing offer. Many were yesterday seeing the Asda merger as a means off pre-empting a Wal-Mart invasion.

The deal could run into competition problems. Because of its size it will be scrutinised by the European authorities.

Analysts said the deal could help solve Kingfisher's succession question, with Sir Geoff remaining as chief executive and Allan Leighton, Asda's highly rated chief executive, as his deputy and heir apparent.

Analysts said the deal would put a rocket under the rest of the retail sector. The deal would be negative for Marks & Spencer and Storehouse, whose Mothercare business could be hit.

Kingfisher shares closed 35p lower at 840p.

Outlook, page 20

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