Shares in Heiton climbed by more than 25 per cent yesterday, closing 35 cents above the price Grafton has said it would pay for its smaller merchanting rival.
The share movement, which saw Heiton add €1.40 to close at €6.70, suggests that the market believes an acquisition should only be made at a higher price.
Grafton's shares performed respectably against this backdrop, closing seven cents lower at €6.43. If Grafton's investors were nervous about a Heiton deal, the larger firm's shares could have been expected to drop more substantially.
The reaction came as Merrion Stockbrokers suggested that Grafton could pay more than the €325 million it has offered for Heiton, while still generating a good return.
Analyst, Mr John Mattimoe, said in a note that when Heiton's enterprise value (including debt of €45 million) was adjusted to reflect the price Grafton paid for its existing 29 per cent stake in Heiton, the effective enterprise cost of the venture would be €326 million. If Grafton were then to sell off surplus Heiton properties, this cost would fall to between €306 and €316 million, Mr Mattimoe has calculated.
An effective acquisition cost of €306 million could see Grafton paying a multiple of just 6.4 per cent of Heiton's operating profit after cost savings, Mr Mattimoe says. This would give Grafton a return on the investment of about 15.5 per cent before tax in 2005.
"This suggests that Grafton has scope to pay a somewhat higher price and still generate a good return," he notes.
Heiton chief executive, Mr Leo Martin, yesterday dismissed the €6.35 offer from Grafton as "paltry".
"We are a fine company and to Grafton we're a huge prize," said Mr Martin. "This is a deal made in heaven."
Heiton is due to issue full-year results on Monday, having brought them forward by about two weeks.
The results, which are expected to be strong, will add a new dimension to Grafton's takeover effort by allowing the market to better judge a fair price for Heiton. Some market sources suggested yesterday that a price of up to €7.50 could still make Heiton a good buy.
It will be in Heiton's interests to clarify the position with Grafton as soon as possible, since the smaller firm is understood to be interested in acquiring Brooks, the Finnish-owned player that holds about 6 per cent of the Irish merchanting market. Heiton and Grafton together have about 19 per cent of the merchanting market as things stand.
Mr Martin declined yesterday to comment on reports that Heiton is a likely buyer for Brooks, but confirmed that the firm has "a number of acquisitions in the pipeline".
If Heiton were to buy Brooks, it would complicate an eventual takeover by Grafton because a combined Heiton/Grafton/ Brooks market share could be too large for the Competition Authority to accept.
Mr Martin urged Grafton to "either pay a full price or let us get on with our lives".
The Heiton board, which includes experienced dealmakers such as former IAWS chief executive, Mr Philip Lynch, and former IBI managing director, Mr Richard Keatinge, will recommend a deal if comes "at a fair price", Mr Martin said. He added he had "absolutely no sense" on whether talks would begin again soon.
Grafton is believed, meanwhile, to have begun courting Heiton's largest remaining shareholders on a possible deal. Fidelity holds almost 10 per cent of the company, with Bank of Ireland Asset Management controlling a further 8 per cent.
