Kingfisher's French deal hits trouble

SIR GEOFFREY MULCAHY, the chief executive of Kingfisher, looks unlikely to win any prizes at this year's French bricolage - do-it-yourself - championships.

Like many an enthusiast, Mulcahy has discovered that his £3.2bn tidying-up project to mop up the outstanding 45% of French DIY chain Castorama is fraught with unforeseen difficulties, and now looks set to take far longer, and cost rather more, than anticipated.

For not only has Kingfisher apparently misunderstood the Castorama operating instructions, but Mulcahy, and his assertive new chairman Francis Mackay, have fallen out with Castorama boss Jean-Hugues Loyez, a necessary collaborator in the project.

Loyez, the long-serving Castorama executive chairman, has adopted a stonewall strategy worthy of any time-served artisan. Thanks to months of fruitless talks, he has had ample opportunity to prepare his tools. So within hours of the announcement that Kingfisher planned a bid for the outstanding shares, his lawyers were making their depositions at the Lille tribunal of commerce.

Back in 1998, Mulcahy thought he had a good deal when he injected his British DIY chain B&Q into Castorama Dubois Investissements in exchange for 54% of the shares.

Castorama, with 15,000 employees, was clear leader in the French DIY market, and Kingfisher had a 20-year option to snap up the minorities at a price to be set by an independent merchant bank adviser. But Lille's commercial lawyers are masters of their craft. And

according to Loyez, the new articles of association for CDI, drawn up at that time, clearly state that Kingfisher must have its financing in place before any offer is tabled.

In a calm but lengthy discourse to his shareholders at Thursday's annual general meeting in the company's headquarters on an industrial estate in the northern French town, Loyez reasoned that Castorama shareholders could quickly see their shares slump if Kingfisher failed to get the cash nailed down.

Agreement might be possible, he suggested, if only Kingfisher could agree a transparent and meritocratic management structure that would give French bosses an equal chance at the top jobs. And, of course, if the price was right. Which implies, in turn, that whoever runs the unified B&Q-Castorama business will need to produce better results from the slow-growing French arm.

Mulcahy's swansong project, it seems, faces three fundamental hurdles - price, management jobs and growth. Investors clearly think Kingfisher can be levered into paying more. Castorama shares are running a whisker ahead of the e67 mooted by Kingfisher, and Paris analysts reckon it is worth e70 to e75 a share.

The Lille tribunal is expected to rule on the acceptability of any offer on Saturday. Then, once officially appointed, Salomon Smith Barney, the independent adviser, will have four weeks to rule on its value.

But to speed the deal, Kingfisher could seek to defuse the disagreements with Loyez over jobs and strategy. Although CDI's board has four Kingfisher directors and five from CDI, each team spoke their own language, relying on translators.

For Mulcahy, a yachting enthusiast who has piloted the onetime Woolies group through 30 years of acquisitions and spin-offs with a captain's authority, the long-windedness of French negotiations can only have been trying. The announcement this week of his impending departure may clear the way for Mackay to broker a compromise.

But however long it takes to do the deal, and at whatever price, the fundamental problem will remain. Overall, CDI sales, at e9.52bn (£5.9bn), last year grew only 6.8%. Despite a 14.1% increase at B&Q in Britain, the impossibility of obtaining planning consents in France limited sales growth there to 5.7%.

Come what may, completing the necessary improvements at CDI will not be easy.