View from City Road: Disposal makes sense for MB

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The Independent Online
FOR almost two years it has been a question of when, not if, MB-Caradon would sell its 25 per cent stake in CarnaudMetalbox (CMB). But yesterday's announcement that the group is to ask for shareholders' permission to cash in the stake implies that the market's wait will soon be over.

Any move in that direction is likely to raise more than pounds 500m for MB-Caradon, and it makes strategic sense to end the company's role as an essentially passive investor. The prospect of a sale also warmed up some old takeover chestnuts in the UK building materials sector yesterday as dealers looked for suitable targets for the company.

The CMB stake is valued at pounds 337.5m in MB-Caradon's books but is producing cash returns little higher than an ordinary UK bank account. In addition, CMB is in effect controlled by CGIP, the French conglomerate that owns a quarter interest and has pre- emption rights over MB-Caradon's 25 per cent.

An early disposal would be well timed and enhance earnings. With CGIP widely regarded as the most obvious buyer, MB- Caradon stands to benefit from the franc's current strength against the pound.

CMB has undergone an impressive turnaround over the past year, after the merger between Metal Box and Carnaud, which created it, ran into serious teething problems. Under CGIP, its margins have improved significantly and this should help MB-Caradon to make a profit of more than pounds 200m on disposal.

But it remains unclear how MB-Caradon would use all that cash. The group will be in a powerful position to make a substantial acquisition in Europe and has a stated ambition to expand its home improvements business. That said, its management, led by Peter Jansen, is unlikely to rush into a spending spree.

Moreover, the group will need to pick its next target carefully, not least because it already commands a strong position in some UK markets, notably central heating and bathrooms. Any further move in that direction could raise monopoly considerations.

A safer bet may be to add a new segment of the building materials market to its existing operations and to look for further purchases in Europe.

MB-Caradon's shares, unchanged at 310p yesterday, are likely to be lacklustre while a bid is in prospect. But they are trading at about 17 times this year's earnings and are reasonable value for long-term investors.