Mulcahy escapes the axe but sees his contract shortened at Kingfisher

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Sir Geoff Mulcahy, chief executive of the Kingfisher retail group, is to be spared the axe by new chairman Francis Mackay, who has decided to work with the industry veteran to address the group's problems.

It is understood that Mr Mackay believes he needs Sir Geoff's help to resolve Kingfisher's key issues. These include its minority stake in Castorama, the French DIY business, and whether or not the electricals division, which includes Comet in the UK and Darty in France, should remain part of the group.

The new chairman, who was appointed in December, is expected to lead a clear-out of Kingfisher's non-executive directors, but Sir Geoff will be retained and will work with Mr Mackay on a succession plan to find the next Kingfisher chief executive. However, it is understood that Mr Mackay has insisted that the length of Sir Geoff's contract be reduced from two years to just one. Sir Geoff had previously been offered a three-year contract by the board when it was chaired by Sir John Banham. He will not have to suffer a pay cut, despite the fact that he is running a smaller company following the sale of Superdrug and the de-merger of Woolworths last year. It is believed that Mr Mackay did not want to alienate Sir Geoff at a crucial stage in the group's attempted recovery. Sir Geoff earned £1m last year and £1.3m the year before that.

Kingfisher's stake in Castorama has been a continuing problem since the complex merger of B&Q and Castorama took place in 1998. Though Kingfisher owns 56 per cent of the enlarged company it only has 50 per cent of the votes. Control rests with the French through an overall holding company.

Buying the remaining equity would cost Kingfisher £2.5bn-£3bn and lead to questions over how the deal would be funded. Kingfisher also needs to persuade the French to agree to the deal rather than go hostile.

Resolving the Castorama problem would pave the way for Kingfisher to look at whether its electricals business should remain part of the group. Sir Geoff has long championed the view that the synergies and stronger balance sheet afforded by a larger group mean it should be kept within Kingfisher. But increasing weight is being given to the view that it would be better to demerge electricals and give Kingfisher shareholders the potential upside if there was a subsequent bid for the independent business. Dixons would be one interested party, as it would be keen to own Darty. But it would have to sell Comet to satisfy the competition authorities.

Further changes to the Kingfisher board are expected over the course of the year as new non-executive directors are appointed. Mr Mackay, who is also executive chairman of Compass, the contract catering group, has appointed John Nelson, the former CSFB banker, as deputy chairman.

Kingfisher had a terrible year in 2001 when the City despaired of Sir Geoff's indecision over whether to sell or demerge Woolworths. The shares sank from more than 500p at the start of the year to 275p in September. They have rallied to 388.5p, up 6p yesterday. Their all-time high was 953p in 1999.