Gullane warning puts HIT's bid in trouble

Bob the Builder's attempts to fix a takeover of Thomas the Tank Engine looked in trouble last night after HIT Entertainment said it would rethink whether to proceed with its £157m offer for Thomas's parent, Gullane Entertainment.

HIT was responding to yesterday's warning from Gullane that profits would be flat on last year's £9.2m after problems with Guinness World Records, the directory it bought from Diageo last year for £46m.

HIT, whose other characters include Barney the Dinosaur, said its 500p-a-share offer this week had been based on Gullane hitting the market's £11.7m profits forecasts. "[HIT's board] is considering whether to make an offer for Gullane and, if, so, at what price," it said.

Gullane's shares, which soared nearly 30 per cent after news of the bid emerged, yesterday fell 7 per cent to 437.5p. The owner of Thomas the Tank Engine, Sooty, Captain Pugwash and Fireman Sam blamed the warning on delays to various GWR licensing deals and the book's disappointing sales in the US.

But Gullane said business related to Thomas remained "strong" and that it saw "significant potential for growth" from its other brands. Thomas contributes 80 per cent of the group's earnings.

Analysts said HIT remained the most likely buyer of Gullane, pointing to the synergies between the two groups, which would become one of the world's largest pre-school entertainment companies. Disney, AOL Time Warner and Viacom could also be interested.

Gullane rejected an all-share takeover offer from HIT in 2000 that would have valued it at up to £300m.