The Cork-based wholesale and retail grocery group, Musgrave, may have to offer up to 140p sterling a share for the outstanding shares in the British supermarket chain if it wishes to get the backing of the Budgens' board, market sources have told The Irish Times.
Budgens shares rose sharply on the London market as investors digested the announcement of late Friday evening that Musgrave had made an approach which might lead to an offer for the British firm.
If Musgrave is required to bid 140p sterling a share then it would mean that it would have to pay more than £170 million sterling (€275 million) for the 123 million shares held by largely institutional shareholders.
Yesterday, Budgens closed up 12¾p to 129p sterling with more than four million shares changing hands.
The two biggest institutional shareholders in Budgens are ABN-Amro Asset Management with 13 per cent and Fidelity with 12 per cent. However, these shareholdings will fall to below 10 per cent if and when Musgrave converts its loan stock into 52.6 million new Budgens shares. Musgrave can convert the loan stock into ordinary shares in September.
Under the terms of the loan stock that Musgrave bought from the German group, Rewe, in August 2000, the Irish group gave a commitment not to make a bid for Budgens without the agreement of the board unless Budgens received a bid from a third party.
A third-party bid for Budgens is virtually impossible given that Musgrave's stake in the company will rise to 45 per cent on conversion of the loan stock. Musgrave will, however, have to secure the backing of the Budgens' board and this will come down to price.
If Musgrave does pay up to 140p sterling a share - a total of €275 million - it would obviously have a major impact on the group's balance sheet.
The most recent results for the year to the end of 2000 showed Musgrave with net debt of €230 million although interest charges were covered comfortably five times by operating profits. Musgrave's strong cash flow is likely to have meant a sharp reduction in debt in 2001.
Market sources said it was inconceivable that Musgrave would have made an approach without being fully confident that it could fully fund the deal and cope with the financial costs. They added that despite the cost of buying out Budgens shareholders, it was unlikely that the Cork-based group would go public to raise funds and was more likely to restructure Budgens after a takeover.
A price of 140p a share for Budgens would not be seen as unduly expensive, as it would represent a multiple of less than 18 times earnings in the year to April 2001. While Budgens is far smaller than the big British publicly-quoted retail chains, these are trading on far higher earnings multiple.
One possible option is for Musgrave to sell some or all of the Budgens 200-plus wholly-owned stores in London and the south of England to the managers of those stores and then franchise the stores in the same way that its SuperValu and Centra stores in Ireland are owner-managed on a franchise arrangement. This was the strategy adopted by Musgrave when it acquired more than 20 Wellworth stores in Northern Ireland from Fitzwilton in the mid-1990s. Those stores were sold to managers and then franchised and rebranded as SuperValu.
