Graham pays pounds 55.4m for Erith

Graham, the builders' merchant, has made an agreed pounds 55.4m bid for competitor Erith in a move expected to signal the start of widespread rationalisation of the builders' merchants sector.

If it goes through, the deal will make Bryan Castledine, Erith's chairman and chief executive, a millionaire. He holds 860,000 shares which under the offer are worth pounds 1.09 each, or pounds 937,000, if he takes Graham shares. If he opts for the full cash alternative, the shares are worth pounds 1.04 each.

Mr Castledine has been granted a further 235,000 share options which, at pounds 1.09, are showing a total profit of pounds 100,960.

The extended Erith family, which owns 20 per cent of the company, stands to make pounds 11m. Erith family members have so far given irrevocable undertakings to sell 13 per cent of Erith shares.

The company has been a family-run business since it began in 1847. The family connection will continue, as Bob Erith, the deputy chairman, is joining the Graham board, as is Mr Castledine.

Shrinking margins are making life difficult for builders' merchants who are unable to pass on to their customers, mainly house-builders, the higher prices being charged by raw-material suppliers.

Graham said that the only way out of the profit squeeze was to become bigger and to use the increased market clout to force supplier prices back down.

Ian Mills, Graham's chief executive, said: "Our customers are experiencing negative inflation while our suppliers are passing on positive inflation. As night follows day, this is going to lead to rationalisation in the industry."

The deal will make Graham the second-biggest builders' merchant, just behind Wolseley. The company expects to see benefits from economies of scale in distribution.

Mr Mills added: "There is also a good geographical fit between the companies. Erith are based in the South-east, where we are thinly represented."

Scott Fulton, an analyst at Smith New Court, said: "The top five builders' merchants account for 30 per cent of the market, but there are hundreds of other smaller companies which can usefully be assimilated.

"It is inevitable the merchants will consolidate," he added.