View from City Road: A consummation devoutly to be wish'd

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Yesterday's confirmation that MB-Caradon is to buy most of Pillar, RTZ's non-core building materials and engineering division, came as no surprise. Even by the leaky standards of City deals, this one had received plenty of coverage before it happened. The details, however, underline the logic of the acquisition.

Both sides were prepared to be accommodating - RTZ because it wanted to be shot of an indifferent performer in an industry in which it had lost interest, Caradon because it was under mounting pressure to do something with the pounds 331m it had sitting in the bank at the end of June, earning a measly 6 per cent in interest.

As expected, Caradon has been able to cherry-pick. Although it has had to go some way towards respecting RTZ's aim of getting rid of the whole division in one go, it managed to leave behind pounds 400m of Pillar's pounds 1.4bn turnover.

Paying 20 times last year's earnings is not asking a lot when stock market investors in the sector are currently prepared to pay about the same price for next year's earnings.

The lowly margins RTZ has been managing to wring out of Pillar, especially the US business, suggest that Caradon will quickly improve the return achieved from those sales. That will bring the price/earnings ratio down to a manageable, if not bargain, level.

Regardless of the price it paid, the acquisition of Pillar gives Caradon a real fillip. Pillar earns 92 per cent of its profits in the UK and US, where demand for its housing-related products is poised for recovery.

The sharp jump in Caradon's share price yesterday, up 24p to 336p, underlined the importance the market attached to a successful deal.

After the rise, a prospective multiple of 19 is perhaps hard to justify on the basis of interim profits which, stripping out the benefits of sterling's devaluation and the profit from the Carnaud stake, were marginally down on last year.

But with plenty of scope for cost-cutting and increased exposure to growing markets, the shares are still attractive and the rights should be taken up.

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