Speculation that Grafton Group is gearing up to bid for its smaller rival in the building materials industry, Heiton Holdings, intensified after Grafton raised £12.2 million (€15.5 million) in a share placing.

Grafton placed 800,000 shares at €19.40 with institutional investors, a move that substantially improves its balance sheet.

The fund-raising by Grafton follows a series of purchases of Heiton shares in the market, and Grafton now holds 12.14 per cent of its rival's shares. Few in the market are in any doubt that these moves by Grafton are a precursor to a full-blown take-over bid, although most believe that Grafton will first try and enlist the support of the Heiton board for a recommended bid.

There is also a belief in some quarters that Grafton's strategy is aimed at preventing any third party buying Heiton as a springboard into the booming Irish construction industry. The British building materials group, Wolseley, has already taken a foothold in Ireland through the acquisition of the midlands-based group, Heatmerchants, for around £20 million and is thought to be planning similar acquisitions of smaller Irish building materials companies.

At its current price in the market, Heiton is worth €132 million (£104 million) and would present a financing challenge for Grafton - hence the share placing. Grafton had net debt of €58.1 million (£46 million) at the end of 1998 but recent acquisitions are likely to push the debt up to around €75 million (£59 million) by end-1999. This latter figure indicates a gearing of around 46 per cent and interest cover of over six times.

Whatever about yesterday's fund-raising, which improves those gearing figures significantly, market sources believe Grafton's preferred strategy would be an agreed bid for Heiton involving a share swap, with a cash alternative for those Heiton shareholders who might want cash.