NCB recommends merger of Grafton and Travis Perkins

GRAFTON GROUP, the owner of Woodies DIY, and Travis Perkins, the owner of Wickes home improvement chain, should merge according to NCB Stockbrokers.

The broker said a merger could yield annual savings of €53 million after three years through combined purchasing, cost cuts and tax savings. NCB analyst, John Sheehan, said the deal risks would be modest as current financial markets will deter alternative buyers and none could match the synergies from a Grafton/Travis Perkins tie-up.

Dublin-based Grafton gets around 60% of revenue in Britain. Its shares have fallen 71% in the last 12 months, while Travis Perkins has dropped around 76%.

Grafton said in May that pretax profit fell “significantly” in the first four months of the year while Travis Perkins said the same month that like-for-like sales at its merchanting division were flat in March and April and it expects markets to weaken further.

NCB said market capitalisations were almost identical and while Grafton’s earnings outlook is worse, it argues this is reflected in its price and said it has a stronger balance sheet than its peer.

“An all-stock merger would create a clear UK/Irish market leader, with enhanced financial capacity to withstand current challenges and fund growth,” said Mr Sheehan.

NCB expects Irish housing to decline around 30,000 units in 2009, while British private sector output of 124,000 units compares with a Government target of 240,000 units by 2016.

It said both are unsustainably low and recovery can be expected in 2010.

NCB also said at its peak new housebuilding accounted for half of Grafton’s Irish merchanting activity and although this has fallen, it expects a further 15% decline in profits from this source in 2009.