Bottom Line: No great bargain

GIVEN that Budgens' experiment in discount retailing only began in August, the pounds 29.7m cash call to accelerate its expansion plans may look a little hasty. But such a move has looked likely since Rewe acquired its 29.9 per cent stake in April. It is already a big discount retailer on the Continent, with 1,400 of its 8,000 stores operating under the Penny Markt banner.

But what is not clear is how long-term Rewe's commitment to Budgens will be. Rewe has the knowledge of discounting and the financial muscle to have been able to go it alone. It has clearly preferred to use Budgens - which was struggling to hold its own against other supermarket operators - as its way into the market. It also looks much cheaper than doing it itself. And it has the option of selling its stake should the experiment go badly wrong.

Rewe would argue it is committed, as shown by its decision to underwrite the convertible issue, which could result in it having a 47 per cent stake in two years.

For other shareholders, that partly limits the risk of investing in Budgens, but it also gives the Germans the best of both worlds. If Budgens' move into discount retailing is successful, Rewe's stake could look cheap. If it fails, Rewe will have saved itself the cost of a full takeover while still being able to exert a significant influence on Budgens.

However, investors would be wise to heed the veiled profits warning in yesterday's announcement. Trading continues to be tough, both because of depressed consumer spending and competition from the deluge of store openings by Tesco, Sainsbury, Safeway and particularly Kwik Save, the main competitive threat to Penny Market.

Budgens has also still to prove that it has found the right formula to make a living out of discount retailing, and to convince investors that its move will be viable once consumers become reacquainted with old habits and start trading up when more buoyant times return. Meanwhile, the company will struggle to make pounds 8m pre-tax for the year to April, giving earnings per share of less than 4p and a p/e of 11. The shares' discount to the market is far from a bargain.