The Investment Column: Redland is worth more

Redland's rejection of Lafarge's pounds 1.7bn all-cash offer looks, at first glance, like a slap in the face for its shareholders. This building materials company has no reason to be proud. A string of profit warnings has sliced the group's share price from a 634p high in 1994 to last month's 220p low before yesterday's bid at 320p a share.

Though it can blame some on rotten luck - like the economic slump in Germany, half of Redland's business - management cock-ups are the real problem. Five years after paying pounds 1bn for French group Steetley the company is still trying to sell it off and admits it vastly overpaid.

So how can Redland justify defending itself against an all-cash bid at such a huge premium? Particularly as there is no obvious second bidder for the whole company. While players like Hanson, Tarmac, RMC and South Africa's Minorco would salivate over Redland's aggregates business, this is just 30 per cent of group. The rest is pan-European rooftiles, a huge, but arguably less attractive part. Lafarge wants the lot.

Redland has no chance of surviving in its current form after this offer. The issue is whether Lafarge will win or just be a catalyst for a break- up of Redland. The market believes that at the very least, Lafarge will have to pay more. Redland's shares closed 79p up at 336.5p, 2 per cent above the offer price. Though Lafarge will probably pay more, this offer is already stretching, pushing its gearing to around 100 per cent.

Redland's defence will be to propose some kind of break up plan, perhaps selling off its UK and US aggregates businesses piecemeal. That could well realise more value than Lafarge's offer. Arend Dikkers at Salomon Brothers reckons the UK aggregates business alone, a tenth of group earnings, could fetch a fifth of Redland's total market value in a trade sale. That implies Redland is worth at least 350p a share. Shareholders should hang on.