Is a TP/Grafton merger on the cards?

A market is the combined behavior of thousands of people responding to information, misinformation and whim

So John Sheehan, an eminent analyst from Dublin stockbrokers NCB thinks that Grafton Group and Travis Perkins should merge.

Well, it would definitely create a market leader by some considerable margin both in the UK and Ireland and Sheehan’s argument is that such an act could create up to euro53m of annual savings and synergies of euro501m from combined purchasing, tax savings and streamlining back-office costs.

And Travis Perkins did find that they made more savings from the synergies with their purchase of Wickes than they thought they would at the outset.

There are plenty of similarities certainly; both companies have described themselves in the past as being run ‘like a family of independent businesses’, though they are probably too big to be able to really do that now. Both companies have reached their current size via a mix of steady organic growth and enthusiastic acquisition. Both have more strength in the RMI field than in volume housebuilding, at least in the UK – Grafton are much more exposed in their Irish markets. Both have a huge presence in the DIY markets.

However, I sensed a collective shudder go through the entire supplier base to both companies at the thought of “combined purchasing savings”.

Whether such a move would get through the competition authorities would depend how they viewed the market. Taking the construction market as a whole, and it’s a no brainer, however, it might get a little more tricky if the authorities looked simply at the builders merchant sector. TP and Grafton between them probably account for 35% of the merchant sector so it could be argued that that would be way too big a player.

But it might not be. After all, look at the brick market.

Another analyst said that such a merger would ‘be like two drunks trying to hold each other up after a party’ and that the Travis Perkins management would be likely to resist any kind of merger extremely strongly.

Still, looking on the bright side, the rumours did boost Travis Perkins shares which when the exchanges opened this morning stood at 504p, a rise of nearly 40p from Thursday. Grafton shares too, rose. And while management might resist, when you’re a plc, it’s all about what the shareholders want.

Unless the market picks up and quickly, we can expect a lot more speculation like this.