French pick a fight with Kingfisher. But will Castorama be their Waterloo?

DIY takeover battle descends into farce as directors fly in to London with rival plan

It has become one of the most farcical contested takeovers of recent times, and yesterday it got still worse. Kingfisher, the UK retail group, which includes B&Q and Comet, is attempting to buy out the remaining 45 per cent stake in French DIY rival Castorama for £3.2bn. But the French are cutting up rough over the price, the procedure and anything else they can think of.

Yesterday the French directors of Castorama flew in to London to lobby Kingfisher shareholders over an alternative plan. However, it was already being criticised as "unworkable" by some Kingfisher shareholders yesterday evening.

During a hastily convened press conference, delivered in French and translated into English, it was clearer than ever that the two sides are at such loggerheads that only lawyers will be able to settle the dispute. As one City analyst said: "Why does everything with Kingfisher have to be so complicated?" At the centre of it all stood one neat bespectacled Frenchman, Jean-Hugues Loyez, Castorama's chief executive, who resigned from the Kingfisher board last week in order to fight against the UK group's hostile takeover attempt. "This is not about price, its about the future of the company," he claimed in heavily accented English. "It is crazy to have a totally British company or a totally French company. We need the best of both."

But the simmering row between the two raises another question. Is it ever possible for Anglo-French commercial enterprises to work successfully?

Think of Marks & Spencer, which announced the closure of its French stores last year only to be forced into a lengthy arbitration process after it was accused of contravening French employment laws.

Think of the Channel Tunnel, that great feat of engineering which was supposed to be a standard bearer of Anglo-French accord but which was eventually marred by recriminations from small French shareholders.

Even Concorde, the first supersonic passenger jet, has experienced mixed fortunes.

Castorama's news conference only served to underline the hopeless culture clash between Kingfisher and the French group. Indeed one banker referred to the "paranoia" surrounding the fraught dealings between the pair as "part of the history between these two". The banker added: "One will say 'it's sunny' and the other will go outside and say 'I saw a cloud, you didn't tell me there was a cloud.'"

The press conference yesterday served up fresh disputes. It emerged that Merrill Lynch, Castorama's financial adviser, has a conflict of interest in the bid as it is also stockbroker to Compass, chaired by Francis Mackay, who is also chairman of Kingfisher.

And it emerged that Merrill Lynch failed to check any potential conflicts of interests at Schroder Salomon Smith Barney, the bank chosen to rule on the fairness of Kingfisher's €67-a-share offer for the Castorama stock it does not already own.

Federico Aliboni, managing director of investment banking at Merrill Lynch, defended his bank at the press conference. He said it had been up to each side to recommend suitable banks "of the first order" to rule on the fairness of the offer and for each side to check for conflicts of interest. "You can doubt or you can double check. We didn't doubt," he said.

Olivier Rigaudy, Castorama's finance director, said: "Obviously we should have discovered it before. We never thought they would choose their closest bank. You just don't think about that."

He said SSSB was "the least possible independent bank on the market. Francis Mackay, as president (chairman) of Compass must have paid $50m-$100m in fees to that bank in two years."

It also emerged that SSSB had changed its story on the potential conflicts of interest. Its first letter to Castorama stated three conflicts; that SSSB was working on the flotation of Homebase, had undertaken advisory work on two acquisitions for Dixons, a Kingfisher competitor and that one of its analysts had published a research note giving €67 as a target price for Castorama shares.

When challenged by Castorama over the Francis Mackay link, and after its appointment had already been rubber stamped by a French court, SSSB sent a second letter adding the Francis Mackay connection as a fourth potential conflict.

A fresh court date has now been set to decide whether SSSB can still be regarded as independent. The hearing has been set for 31 May, just ahead of the Kingfisher shareholder meeting on 7 June to approve the deal.

Castorama's alternative to the Kingfisher buyout plan is for Kingfisher to demerge its Castorama stake, issuing the Castorama shares direct to its shareholders.

Mr Loyez also proposed to find a new name for the group that did not denote either French or British nationality. "Perhaps the name of a nice bird, for example," he said in a reference to the Kingfisher name. He said his suggestion would save Kingfisher £3.2bn, equivalent to 300 new stores for Castorama or six years capital expenditure. However, the Castorama proposal failed to adequately address the issue of control.

Mr Loyez said the Castorama board would consist of four members from Kingfisher, three from Castorama and two independents. But the key problem would be the suggestion that Mr Mackay and Mr Loyez would then select a chief executive. Given the track record of disputes between the two sides it is hard to see an agreement being reached without recourse to the courts.

Mr Loyez said he has already proposed his alternative to the Kingfisher board with no success. "We proposed this vision to Kingfisher but I was told in March that Kingfisher would remain an entity with two divisions (electricals and DIY). At the start of May, just before the announcement (of the bid) Francis Mackay said 'no, my vision is for the separation of the two entities.'"

One senior fund manager who had met with Mr Loyez yesterday said he was not impressed with the French proposal. "No. It sounds most improbable. Clearly some of the things they say have merit but it seems they are just pushing for a price higher than €67." The fund manager said he would vote in favour of the Kingfisher proposal on 7 June.

Several fund managers said the real agenda of the Castorama directors was to push the offer price higher as the five directors stand to pocket more than £100m in Castorama share warrants. Mr Loyez denied this but did say that he expected a higher price. "The value of the company is more than €70 [per share], easily."

Mr Loyez said he had only sold shares twice in 25 years, "once to buy a house and once to pay tax. If there is a demerger I have no intention of selling my shares."

Kingfisher said it remained confident that its shareholders would support the bid approach, which will be funded by a £2bn rights issue.

"The demerger plan doesn't address the fundamental issue of how the group will be managed. We would still end up with French focused management who do not see themselves accountable to the British management. Our bid will clarify that problem once and for all."

If the French court rules that SSSB cannot be perceived as an independent bank on the takeover, then Dresdner Kleinwort Wasserstein may be chosen instead.

Separately Castorama posted its first-quarter results after the markets had closed yesterday in what Kingfisher said was a breach of stock market regulations. Kingfisher said the results should not have been announced until cleared by Kingfisher which had been due to issue its figures simultaneously on 12 June. Kingfisher may now issue its figures today as a result.

Castorama said first-quarter profits had risen 32 per cent to £146m, driven chiefly by B&Q. Operating profit in the B&Q division was up 31 per cent, indicating far lower growth in France.

JEAN-HUGUES LOYEZ DO-IT-YOURSELF REBEL

Jean-Hugues Loyez, 56, is a neat, smartly dressed Frenchman who has managed to kick up an almighty fuss over Kingfisher's attempts to buy out the remaining shares in Castorama.

He has worked at Castorama for 28 years and speaks with a passion that shows he is not willing to see his company sold out from under him unless he is satisfied it is right. As one of the five French directors he stands to share £100m from the deal, his interest is understandable.

Born in northern France, he is a self-confessed "country" boy who enjoys hunting and shooting. "I am an engineer by training," he says. "I joined Castorama as IT manager and put together their management systems." Mr Loyez wanted experience of operational management so he went to run a store near Lille, then became regional manager looking after 10 stores. In 1984 he became managing director of the whole company. By 1992 he was chairman and chief executive.

He claims he is a DIY enthusiast, despite his obvious wealth. His best job, he says, was in his garden. "Over 15 years I converted a barren old field into a beautiful garden."

His other interests are his four children and skiing.

He is coy on his relationship with Sir Geoff Mulcahy, Kingfisher's chief executive. "We haven't spoken for a few days," he says with a barely suppressed smile. He is more complimentary about Francis Mackay, the new Kingfisher chairman. "Francis Mackay has an international vision. He is happy to stay at the top and not get too involved with things lower down."

In other words, he doesn't meddle, unlike Sir Geoff.