Stock Market Week: ABF's pounds 1.5bn cash mountain provides investors with food for thought

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The Independent Online
Garry Weston, avuncular chairman of the sprawling Associated British Foods giant, is unlikely to create much excitement with half- year profits today which will probably emerge at pounds 187m, up from pounds 181m.

Still, the stock market has discounted the bread to sweetener group's current profits performance. It is much more interested in its takeover appetite.

Last month the group sold its Irish supermarket interests to Tesco, collecting pounds 640m in the process. The deal lifted its cash pile to pounds 1.5bn, providing an acquisition war chest of at least pounds 3bn.

What is Mr Weston, who will soon be celebrating his 70th birthday, going to do with the cash hoard?

He is not, unlike some, going to be content to sit on the cash, merely accumulating interest. There is an outside possibility he will hand all or some of the money to shareholders through a special dividend or share buy-back. His decision to bring his results forward by two weeks could, some assume, point to a cash handout before Labour tightens the rules.

Mr Weston has run ABF for 30 years, developing what was a diverse food group worth around pounds 90m into a near-pounds 5bn business, taking in such names as Burton's biscuits, Sunblest bread, Silver Spoon sugar and Twinning teas.

It operates in difficult markets, often where retailers call the tune. But its muscle power is huge; it has 28 per cent of the bread and flour market and an entitlement to a 50 per cent sugar market quota.

Profits growth has been reasonable. Helped by the takeover of British Sugar, for pounds 800m, the pre-tax return has grown from pounds 267m in 1992 and could reach pounds 450m this year.

During his reign Mr Weston has not been deal-happy. He has not tossed shares around and ABF has remained firmly in Weston control with the family owning 53 per cent of the capital and Westons remaining involved in running the empire. Still, he has put through some intriguing deals, including selling the Fine Fare supermarket chain with impeccable timing.

Now, with retirement looming, he has the ammunition to make a spectacular farewell. There is even talk of a strike at the Tate & Lyle sugar group, currently valued at just over pounds 2bn. But he is likely to curb any such predatory instinct. After all, a T&L bid would hit insurmountable monopoly problems.

But sugar could be very much on Mr Weston's mind. The Polish sugar monopoly, about to be privatised, is said to be intriguing him and he must also be aware of the opportunities offered by Unilever's decision to sell National Starch and Quest, a food flavourings group. A US acquisition is another possibility.

On past form Mr Weston will not overpay. And he will bide his time.

Last week shares achieved a little progress, generally reflecting New York and ignoring the blood and thunder of the election campaign, although Labour twitchiness over the former nationalised groups caused some excitement.

Robin Griffiths, chartist at HSBC James Capel, feels the market's most quoted adage, sell in May and go away, could prove sound advice. He sees "no disaster on the horizon"; maybe a correction. But equities will move up again later on.

"The economy is strong, the institutions have funds to invest and the public is happy that house prices are rising again."

In the past, elections have often had a dramatic influence on shares. But with the result this time looking so predictable the one element - uncertainty - guaranteed to create volatility has been missing.

Should, of course, Labour's seemingly unassailable position begin to crumble then the swings and roundabouts of electioneering will produce a much more lively market reaction.

In what is a thin week for company profits ABF faces competition from only one other Footsie constituent, the recently created Anglo-American LucasVarity aerospace and vehicle components group. Its shares have been in reverse for much of the time since the pounds 3.2bn autumnal merger, falling from a 259p peak to 199.5p on Friday.

The weakness highlights a split over how shareholders should be rewarded. The group seemed at one time to favour dropping dividend payments for a rolling programme of share buy-backs. Such a move was supported by US shareholders, most of whom came in with Varity. They regard buybacks as more tax-efficient than dividends. But angry UK institutions let it be known they would oppose any move to scrap dividends because of tax credits.

LV, it is thought, hopes to solve its US/UK dilemma by adopting a formula which accommodates the opposing camps. One solution could be to cut the dividend, say to 4p a share, from the 7p made by the old Lucas operation, leaving around pounds 70m available for share-buying.

American Victor Rice, LV's chief executive, has identified pounds 100m of disposals and indicated yearly cost savings of pounds 120m.

The figures, due tomorrow, will not offer any surprises. In January LV said analysts' estimates of pounds 280m were a "realistic assessment" of its short term trading outlook.

On Thursday two of the market's laggards report. Food group Albert Fisher should produce interim profits moderately higher at pounds 19.5m. The shares, 43.5p, have underperformed as it displayed a vulnerability to outside shocks - the latest known upset is harsh winter weather devastating its cockle harvest. Ray Caley at stockbroker Hichens Harrison recently tipped them to treble in 18 months.

House of Fraser, the department stores chain, has almost been written off by the City. Since arriving in 1994 its shares have touched 227p; they now bump along at 164.5p.

John Richards at NatWest Securities expects year's profits a little higher at pounds 14.6m. But he points out a 1 per cent recovery in margins equates to pounds 8m of operating profits and HoF has rich property assets.