Grand Met looks too large to digest

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The Independent Online
WILL someone bid for foods to drinks giant Grand Metropolitan? There have been sniffs of a prowler, and Granada's surprise pounds 3.4bn assault on Forte has whetted City hopes of an even bigger mega-merger. But Grand Met is a different order altogether. A bid would have be for a minimum pounds 10.5bn. And management has warned it would rather break up the company itself than let anybody else do it. With a track record of reinventing itself every five years, it is a claim most hostile bidders would take seriously.

That means names such as Guinness, Seagram and KKR, the US leveraged buyout artists, are unlikely to come forward. Even then, Grand Met should get better value if it dismembered the business itself. This leaves potential investors wondering what there is to go for in the shares, at 430p, given their failure to hang on to any of their recent gains on the bid speculation.

Despite this, they remain on a handsome yield of 4.2 per cent. If Grand Met has been expert at living off leverage itself, its debt is at manageable proportions and should improve as the company is set to sell parts of the business. Some 750 managed and 1,350 franchised Burger King stores, and the Pearl Eye stores worth up to pounds 100m are on the block. Final pre- tax profits next Thursday, Lord Sheppard's last, will slip to around pounds 910m from pounds 945m after loss of rights to Absolut Vodka. But with food and market share in the US improving, the shares remain a long-term buy.

FUNNY goings on in TSB shares. After the merger with Lloyds Bank was announced in September, the shares rocketed 45 per cent to their current level of 404p. Given that TSB holders are to receive one Lloyds-TSB share, plus a special dividend of 68.3p for each TSB share - worth around 372p - broker Charles Stanley asks the pertinent question: why are TSB shares trading above this level?

There has been speculation of a counter-offer, from either HSBC or an Australian bank. But, as Charles Stanley points out, the imminent completion of the Lloyds deal makes this an increasingly unlikely prospect.

Sell in the market, and reinvest some of the funds back into Lloyds. That way you will still pick up the benefits from the merger, outweighing the risks of missing out on a higher offer.

IN THE past, this column has been scathing of Sterling Publishing, and rightly so. But the troubled business has at last managed to sell its Turret Group for pounds 7.9m in cash. And in October, it disposed of its US business, Sterling Northeast, for pounds 2.7m. Sales in the remaining reference book division should now have some stability.

While the shares retain a deal of risk - no sign yet of any management changes to beef up the board - the preference shares could offer an interesting punt. At 51p, they yield almost 15 per cent. With operating profits likely to beat pounds 2m, there should be ample money to cover debts of pounds 4m, and the prefs' pounds 600,000 payout. A risky, but potentially profitable investment.

BUNZL has suffered from overreaction. When a company in a viciously cyclical industry takes a hit, you can count on other shares in the sector tumbling in sympathy. The knack is spotting those which have been marked down unfairly and buying for their recovery potential.

Arjo Wiggins' profits warning the week before last was a case in point. Shares in fellow paper and packaging groups collapsed, as brokers marked prices down across the board. Bunzl was no exception. From 196p, they are now 176p.

True, the paper sector is approaching a critical turning point in its cycle. There is evidence of destocking across Europe, while the remarkable price rises of the last two years in the main paper products have almost certainly peaked. But Bunzl is in totally different areas to Arjo, with the exception of fine papers, the one area in which Arjo was doing well. Buy.

PACKAGING group Wace expects its recommended pounds 26.2m cash offer or 195p a share for specialist printer Ferry Pickering should be earnings enhancing in its first full year. Although Wace shares were off on the news, to the week at 232p, down 13p in two days, the company can fund the deal out of cash. Expect more acquisitions to come. Meanwhile, the shares are a buy.

DIRECTORS of Euromoney Publications (943p) made hefty profits from share sales earlier this year. But in September, the group said profits would fall a quarter from last year's pounds 24m, and the price fell like a stone, curbing the opportunity of similar gains for a while to come.

Full-year results on Tuesday will be watched closely. Long-term shareholders are still showing substantial gains. The all-important September edition of its flagship magazine Euromoney, makes a quarter of advertising revenue on the back of the IMF meeting. Sales were exceptionally weak this year. Avoid.