Outlook: Kingfisher/Asda

Kingfisher/Asda

HAVING HAD a weekend to sleep on it and now with a formal statement to feed upon, the logic of Kingfisher's pounds 18bn tie-up with Asda remains as bewildering as ever. True enough, size gives companies more financial muscle in doing deals and provides greater protection when things go wrong. In a larger company, the fallout gets lost in the wash.

But does Kingfisher really need Asda to help develop B&Q in Brazil, Taiwan and Poland, as its stock exchange announcement implied yesterday? The very idea is, frankly, a laughable one.

There are some synergies in this deal, of course. There will be some buying benefits from overlapping areas like confectionery and children's clothing, plus the usual distribution and administrative savings. There will also be some cross-selling benefits from putting the George label of Asda clothing in Woolies, and so on.

But the more you look at this merger, the more defensive it seems on both sides. For Asda to accept the deal on these terms, with such a paltry premium for change of control, can only be a sign of management unease about the future. Asda is going great guns now, but with Tesco sweeping all before it, what will the picture look like two or three years out?

For Kingfisher this deal looks more and more like an anti-Wal-Mart invasion device. It was only a few years ago that Kingfisher started rolling out the huge B&Q Warehouse format when rumours were rife of the American Home Depot chain coming to these shores. The creation of a Woolies-Asda behemoth looks like similar thinking.

There is also the quest for scale for its own sake. Never under-estimate management ego in this regard. This deal would enable Sir Geoff Mulcahy to stride the global stage as one of the world's top 10 retailers. Perhaps that is the biggest motivation of all.

In the City, there is still some hope that Asda will attract a higher offer, perhaps from Wal-Mart itself, or at least that Kingfisher might be press-ganged into raising its bid. Investors would be unwise to count on it. This is a poor deal, and it is not going to be improved by upping the terms of the share swap offer.