View from City Road: Swoop on Kingfisher

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The Independent Online
THE stock market has had two weeks to chew over Kingfisher's pounds 1.1bn purchase of Financiere Darty. So the publication of the terms and pounds 313m rights issue, both widely discounted, did little to alter the view that Sir Geoff Mulcahy, the chairman, and his team have pulled off a typically safe, well- researched if slightly dull acquisition that will enhance earnings from year one.

One exciting aspect of the deal is the lofty vision of an internationalised electrical retailing market in which Kingfisher would bestride the European Community. But that is a long way off.

Perhaps the best news yesterday, contributing to a 30p rise in the share price to 557p against a theoretical ex-rights price of 511p, was the very strong performance by Woolworths and Comet in Kingfisher's second half, as revealed in its profits estimate for 1992/3, which suggests both an upturn in consumer demand and good management.

Beyond crystallising a pounds 351m profit on their 1988 buyout, the benefits to Darty shareholders and management are not entirely clear.

Jean-Luc Selignan, development director at Darty, insisted yesterday that the French retailer, despite towering debts, was not confronted by any financial constraint on its expansion plans. Since 1988 Darty had opened 40 stores, had generated cash of Fr1.15bn ( pounds 143m) a year on average and was on course to meet its target of at least 180 stores by the end of the century by expanding south and south-westwards.

Kingfisher shareholders may also wonder how long Darty can hold onto an operating margin of 10.9 per cent, which is high by international standards, if a French recession really takes hold. A victory for the expansion-minded right wing at next month's elections could answer that concern.

There may even be something in Kingfisher's claim that greater buying muscle in dealing with an increasingly homogenous group of electrical manufacturers will help gross margins.

Strong cash generation should rapidly reduce pro forma gearing of 66 per cent. Nomura is forecasting pre-tax profits of pounds 320m for the current year, implying a multiple of less than 16. This is not high for a store share and only a modest premium to the market. The rights should be taken up.

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