Bottom Line: A deal too far?

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The Independent Online
IS Compass about to do a deal too far with the purchase of Canteen Corporation of America? The stock market, which did not like last summer's SAS catering purchase, certainly thinks so, to judge by a 13p share price fall.

At first sight, it would appear that there are absolutely no industrial synergies - apart from worldwide agreements with drinks companies - that can justify the Compass arguments.

Against that, just to dip a toe into the US catering market through a small acquisition would not provide the mass needed to extract significant cost savings out of any subsequent acquisitions.

Contract catering margins in the US are less than 3 per cent, against the 8 to 9 per cent Compass achieves in the UK. Big savings, through economies of scale, can only be made by big buying.

Investors, even if they accept this point, are bound to wonder if the planned rights issue will be large enough to satisfy the expansion aspirations of the directors.