View from City Road: A rich gravy for RHM holders

FORGET focus or commercial logic - in the new conglomerate takeover game anything goes. And since it is a game with very few players, sooner or later Greg Hutchings was bound to run up against his former boss Lord Hanson.

Once analysts had finished rubbing their eyes in disbelief that Tomkins, purveyors of fine valves, lawnmowers, handcuffs and bicycles, was proposing to get into sliced bread and gravy browning with a pounds 926m agreed bid for Ranks Hovis McDougall, it became obvious that there was only one short-term winner - RHM shareholders, who may yet find themselves in an auction.

Tomkins' conglomerate style falls midway between BTR and Hanson. Like BTR, it believes in developing manufacturing operations to maximum efficiency rather than breaking up businesses. On the other hand, like Hanson, its tastes are eclectic.

The stock market patently failed to swallow Tomkins' line yesterday that manufacturing and selling bread was just the same as turning out radiator valves.

Since the agreed offer represents only about 14 times RHM's depressed 1991/2 expected earnings, Tomkins' claim that the bid would not dilute earnings looks beyond challenge, particularly given the temptingly fat cost base at RHM. The company's strong balance sheet would remain intact.

But Tomkins' suggestion that dealing with K-Mart in the US had prepared it to act as suppliers to the likes of Sainsbury and Tesco in a static retailing climate seems implausible.

Fears that Tomkins would damage the quality of its earnings, apart from the sheer equity indigestion involved in the company's second doubling in size in six years, sent its shares crashing through their theoretical ex-rights price. This at a stroke removed its hard-earned premium rating to the market.

And what of Hanson? Having said that 220p was a full price for RHM, can it credibly say that a price of more than 269.5p, the effective value of Tomkins' cash alternative, is still good value for Hanson shareholders?

But can its image as prime takeover specialist withstand another embarrassing retreat after the ICI debacle? The market seems to think that pride and a big advance corporation tax problem will triumph, leaving RHM shares trading a tentative 3.5p over the effective cash alternative and almost 10 per cent above Tomkins' combined shares and cash offer. With two bidders in the ring, RHM shareholders can safely sit back and leave Hanson to solve its dilemma.