View from City Road: Kingfisher may get away with it

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The Independent Online
KINGFISHER'S desire to buy the top-notch French electricals retailer Darty is wholly understandable from a strategic standpoint. It has little room for anything other than organic growth in the UK as its retail stable already includes DIY, electricals, chemists and the Woolworths mix.

After four years of on-off talks with Darty, Kingfisher is not rushing in with precipitate haste. It does not intend to make the mistake of other British retailers, which have ventured abroad and attempted to impose British ideas on unwilling consumers. Nor is it buying a basket case.

Darty is the market leader with a successful formula and profit margins of 10 per cent to 12 per cent. Presumably Kingfisher can bring financial muscle to the party and together the new partners can look further afield in Europe.

A purchase price of more than pounds 1bn looks likely. In addition Darty has pounds 500m of debt that will have to be taken on board but, being a management buyout, it is a strongly cash-generative company.

A rights issue looks a likely option - a one-for-three to raise around pounds 860m is being mooted. Depending on which Darty profit figure is accurate, mild dilution of 5 per cent looks likely, as yesterday's share price fall shows. Earnings-enhancing debt funding is a possibility but would severely strech the balance sheet, even with Kingfisher's likely year-end gearing of 10 per cent. It would also hurt its share price.

After a flurry of retailing rights from Asda and Burton, another and even bigger retail issue can only hurt the sector. However, Kingfisher may well get away with it if it is perceived to have combined the right acquisition with the right price.