Mulcahy painted into £3.2bn corner

THE venue was an unremarkable Paris office block. The date was 17 April. On one side of the table sat the shambling, ginger-haired figure of Sir Geoff Mulcahy, the 60-year-old chief executive of Kingfisher. On the other was Jean-Hugues Loyez - the dapper, bespectacled head of French DIY chain Castorama and seven years Mulcahy's junior.

The two men's businesses had been loosely tied together since 1998 when Castorama was brought under Kingfisher's umbrella to sit alongside the UK group's DIY operation, B&Q. But the relationship had become increasingly tense. B&Q had marched ahead, consistently beating its domestic rivals. Castorama had conspicuously failed to keep up.

By the time Loyez and Mulcahy met in Paris, the relationship between the two men was tense and sour. Since Kingfisher had got rid of Superdrug and Woolworths last year - a lengthy and awkward process completed only last September - Mulcahy's priority had been to sort out the relationship between his UK group and its troublesome French sister.

The 1998 deal hadn't amounted to a full tie-up. Kingfisher had achieved a 55% stake in Castorama, but only 50% voting rights. It was an unsatisfactory arrangement, one that tied Castorama to Kingfisher through a system of byzantine complexity. And most important of all, it had proved profoundly frustrating to Mulcahy as he had been forced to watch from afar as Castorama failed to show the returns he was sure it could deliver.

After last September's cleaving of Woolworths from Kingfisher, Mulcahy had embarked on the task of trying to bring Castorama fully under his control. The process was given fresh impetus with the arrival in January of Francis Mackay as Kingfisher's new chairman, replacing Sir John Banham.

Week after week, month after month, Mulcahy held meetings with his French counterparts, sometimes in London, sometimes in Castorama's Lille head office, sometimes in Paris with their lawyers. Each time he tried to persuade the Castorama management that they should back an offer from Kingfisher that would give the British firm 100% ownership and complete, unfettered control.

One of the Kingfisher team later reflected: 'They [Castorama] would raise a list of points, a string of questions. We would go away and then next time we met, we would answer their questions. Then they would come up with another list. We simply weren't making any progress. We decided we just had to say ''enough is enough''.'

So the 17 April meeting was called. Mulcahy and his Kingfisher team went to Paris. By now, it was clear that the French and British views could not be reconciled.

The meeting started with a brief chat. Then Mulcahy leaned across the table and handed Loyez a piece of paper. It was a letter giving official notice of Kingfisher's plans to invoke Article 21 - a provision of the original 1998 merger agreement that set out a mechanism by which the UK company could seek full control. Mulcahy's move was calmly received. Indeed, one of the French team is said to have remarked at the time that the process could be completed within two or three weeks.

In essence, Kingfisher had to make a bid for the 45% of Castorama it didn't already own. An independent bank was to be appointed to say whether the suggested price was fair. If the deal was approved, then that was that - Kingfisher could go ahead and take the control of Castorama it had sought for so long.

But over the subsequent three weeks, the French found reasons to quibble. Finally, last Wednesday morning, Kingfisher announced its plans to the world. It proposed an offer valuing the 45% stake at £3.2bn. It would raise £2bn from its shareholders through a rights issue. And having completed the Castorama takeover, the group would spin off its electricals arm - including Comet in Britain and Darty in France - as a separate entity.

Now, the struggle between Kingfisher-and its recalcitrant French partner came out into the open.

Castorama said Kingfisher's strategy was wrong: there were better, though conspicuously unspecified, ways of enriching shareholders. According to the French, ' transferring the group's operating headquarters to London would be a strategic, cultural and business error. This decision would have serious consequences for all the group's operating units.'

The Castorama camp asked a court to appoint a representative to speak for them. Kingfisher saw this as little more than a delaying tactic. In any case, on Friday afternoon, the court refused, saying it was unnecessary.

At the same time, frustrated by Castorama's unwillingness to choose an independent investment bank from a list of three suggested by Mulcahy and his team, Kingfisher went to a Paris court and asked it to make the choice. By Friday night, Schroder Salomon Smith Barney had been named.

Kingfisher may face further setbacks in its quest to push the deal through. It may be compelled to pay more than the e67 (£42.30) a share now on offer. But in truth, Kingfisher simply has to complete the Castorama deal. Mackay coolly declared last week that if Kingfisher were asked to pay more than e67 a share, it might have to think again about whether to press ahead.

In reality, it has no choice. Castorama's lacklustre performance drags down the group as a whole. Four years after the 'merger', remarkably little merging appears to have been achieved. The 1998 deal has Mulcahy painted into a corner. He has to get out. And, of course, if everything goes to plan, he will, within a year, be completely out of Kingfisher. A new chief executive will be found for the remaining DIY operation.

Mackay insisted last week that the electricals operation should be floated. A senior figure in Kingfisher admitted that there was 'probably a near-50% chance' that a buyer would come along before the flotation even takes place. Dixons is the obvious buyer - though it would have to shed the British business, Comet, to meet competition concerns.

One way or another, the Kingfisher empire that Mulcahy built up over 20 years will be tidied up and dismantled - whatever disruption is attempted by the French.