Kingfisher mulls rights issue for Castorama buy

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The Independent Online

Kingfisher, the DIY to electricals group, is lining up a rights issue for at least £1bn to give it the finance it needs to take full control of its troubled French division, Castorama.

The group, headed by Sir Geoff Mulcahy, is understood to have broached the subject with financial advisers and investors in recent weeks, and it could give an update on its plans with full-year results next week.

Kingfisher's stake in Castorama has been a continuing problem since it bought a majority holding in the French DIY business in 1998 and merged it with its own successful DIY chain B&Q.

The complex structure of the deal meant Kingfisher owns 56 per cent of Castorama but only controls 50 per cent of the votes on the board. The arrangement hamstrung Kingfisher's attempts to reform the business and maximise synergies with B&Q, which is a crucial source of profits in the UK.

Although a rights issue is seen as the cleanest solution, Kingfisher has not ruled out alternative financing options, including a mixture of debt, equity and a convertible bond issue to fund a deal. In total Kingfisher would have to pay about £3bn for the remaining stake in Castorama.

Sir Geoff, the chief executive, has been looking for an opportunity to extend control over Castorama for some time. The plan has been given new momentum by Kingfisher's new chairman, Francis Mackay, who is keen to stamp his authority on the unwieldy retailing group.

Mr Mackay is also known to be in favour of the demerger of Kingfisher's electrical retail business, including Comet in the UK, to create a separate £2bn FTSE 100 company. Sir Geoff is believed to be less keen, but both agree that bringing Castorama in line is the first priority.

The company is under pressure to formulate a convincing strategic plan to turn around its faltering share price, which almost halved in value in 2001.

Kingfisher's shares have picked up this year, but in trying to get a rights issue off the ground the company is having to grapple with ongoing City scepticism about its direction.

Castorama's shares have also done badly, which should make the business easier to snap up, but the UK company will be under a lot of pressure from shareholders not to overpay for the minority stake in a business it already controls.

A fall in like-for-like sales at Castorama in the fourth quarter of last year contributed to an overall slowdown at Kingfisher. While Kingfisher is expected to show it has achieved strong sales in 2001, Castorama's rate of growth is likely to be significantly slower than the group's UK divisions.