With British brick manufacturer Ibstock now safely under its belt following Friday's announcement that it owns 98.1 per cent, CRH now needs only to sell its Keyline builders merchants, for a good price, to complete successfully an aggressive start to 1999. Looking at Keyline's record, it is pretty clear why CRH does not want to hold on to that subsidiary. Keyline has boosted sales from £170.5 million sterling (€244 million) in 1993 to £302.0 million in 1997. When the figures for 1998 are available, they will indicate continued growth.
However, pre-tax profit has been very cyclical. A loss was incurred in 1993. Profits returned the following year and rose to £4.2 million in 1995. Then there was another dip in 1996, before recovering to £4.8 million in 1997.
Equally, the trends of the ratios have been up and down. The average pre-tax profit margin was 1.07 per cent in the 1993/7 period, but this varied between a negative and 1.9 per cent.
The average return on shareholders' funds was 3.45 per cent. However, this varied between a negative and 6.0 per cent.
The average return on capital employed - a tool rightly favoured by CRH - was 2.68 per cent. But this again varied between a negative and 4.5 per cent.
Debt has never been a problem for Keyline. The gearing - ratio of debt to shareholders' funds - was a modest 33.5 per cent in 1997, though it had been a good deal lower. What these figures do not disclose is the improvement which took place in 1998. So what CRH is selling should warrant a higher multiple than indicated by the 1997 figures.
In addition, builders merchants are becoming more expensive to buy. This was clear from the purchase of Hall by Wolseley last year. Those in the industry are now noting that the consideration is based on turnover and not on profits or net assets. Wolseley paid the equivalent of 0.66 of sales, and this has been used by some analysts to put a price tag of £200 million on Keyline. CRH has not been able to build up sufficient scale in builders merchants to warrant a continuation in the British market. The group has noted that "number five in a product sector is lower than we would like to be and growing that market share is very difficult".
Keyline's net tangible assets are a little over £100 million, so a sale would represent a substantial premium on these. However, Keyline is very unlikely to be purchased by an Irish group.
Heiton, the Atlantic Home Care DIY group, has been mentioned as a possible contender. Indeed, the company, while recognising that Keyline is a much bigger company, has pointed to the financial instruments that can be used to organise a take-over. However, Heiton's sedate expansion must rule it out as a serious contender.
Grafton, the Woodies DIY company, with its more expansionist style, is a more likely contender (on paper). Such an acquisition would more than double its group sales. Grafton's British sales are expected to contribute 50 per cent to group sales, so an acquisition of Keyline would treble its UK sales.
That, and a high multiple, are likely to steer Grafton away from making a bid. Also, Grafton is busy bedding down the three British acquisitions, including British Dredging, which it made last year. CRH has paid a premium price for Ibstock. That reflected the benchmark price established by Austrian company Wienerberger, which had bought a minority stake before accepting CRH's offer. Nevertheless, it is a quality company and should fit in well with CRH's other activities.
CRH is now in a more aggressive mode. This is clear following its dawn raid on Ibstock (before making a bid) and its decision to sell a major part of the group, Keyline. The new stance should ensure CRH's future growth.
