Kingfisher launches £2bn rights issue for Castorama deal

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Outlook: Kingfisher; Duffield/Jupiter; Amey

Kingfisher promised to treat Castorama with kid gloves yesterday after launching a deeply discounted £2bn rights issue to fund the takeover of the French DIY group.

Sir Geoffrey Mulcahy, Kingfisher's chief executive, pledged that there would be no compulsory job losses after the £3.3bn takeover. Castorama would "naturally" continue to have its headquarters in France where it would be run by its local management under the leadership of the chief executive Jean Hugues Loyez, he added.

Kingfisher also described the cost savings it planned to make by integrating Castorama fully with its own DIY business B&Q as "modest" and said there was no question of dispensing with the Castorama brand, which has performed poorly in the French market because of a lack of investment and innovation.

The decision to proceed with the purchase of the 45 per cent of Castorama that Kingfisher did not already own followed a report from the investment bank Rothschilds which concluded that its €67-a-share offer to the minority shareholders represented "fair value".

The takeover will pave the way for the break-up of the Kingfisher group and the departure of Sir Geoffrey after 20 years at the helm. Kingfisher intends to hive off its electrical goods chains, which consist of Comet in the UK and Darty in France, in the next 12 months either through a demerger or more likely a flotation in Paris.

Francis Mackay, Kingfisher's chairman, said progress was being made on a replacement for Sir Geoffrey and the group expected to make an announcement within the next four months.

The Castorama deal will be funded by a one-for-one rights issue at 155p – a 50 per cent discount to Kingfisher's closing price last Friday – and £1.2bn in bank borrowings. The rights issue has been fully underwritten by UBS Warburg, CSFB and Goldman Sachs.

Underwriting fees and legal charges associated with the rights issue are put at £40m while Rothschilds is receiving a £5m fee for the one month it took to compile the fair value report.

Kingfisher said the takeover would dilute earnings in the first year because of the fall in stock markets since it first unveiled its offer to buy out Castorama in May. Since then, its own shares have fallen 20 per cent while the main French index, the CAC 40, has dropped 13 per cent.

Savings from the takeover are put at £30m to £40m in the first full year rising to at least £55m in the following year. The bulk of the savings will come from squeezing supplier costs, refurbishing Castorama stores, overhauling its pricing policy and adopting common ranges of products. Sir Geoffrey said that, over time, 50 per cent of the products stocked by Castorama and B&Q would be common compared with 10 to 20 per cent now.