'£734 million grey hole' may disrupt Tarmac merger plans

Exclusive by John Leitch



City brokers are warning that a £734 million "grey hole" in Tarmac's finances - caused by a steady build up of debts - could hold back Tarmac's merger discussions with industry partners.

The problem could also block alternative proposals to float-off the construction division. Stockbroker group Schroders warned that Tarmac would need to inject £200 million of cash to make a de-merger viable.

The grey hole problem arises because in the 12 years to 1997, Tarmac's total debtors have been growing at the worrying rate of 9.5 per cent a year, a figure that outstrips its 6 per cent growth in sales. At the end of 1997, Tarmac's debt of £734 million was equivalent to 92 per cent of its shareholder funds.

Analysts believe that a proportion of these debts will prove to be unrecoverable, thereby forcing the group to make sizeable financial provision.

One analyst commented: "To work out the value of Tarmac's construction business is a minefield. The debts are all in relation to on-going projects. Its problem is the perceived level of indebtedness. Tarmac must start getting the cash in."

Stockbroker Schroders has recently released a seven-page analysis on the Wolverhampton-based group in which it reported: "Tarmac will continue to consume cash. The group's financial risk profile is not declining but rising."

Tarmac, potential deal with Aggregate Industries could also be in doubt after city speculation this week that RMC might step in with bids for both Aggregate Industries and Tilcon. The pre-emptive strike by RMC would ensure that it was not sidelined in the reshaping of the UK aggregates industry.

One analyst said: "RMC's priority is whether it could get squeezed by changes now or in the future. It has to spoil AI's bid for Tarmac."

RMC is already strong in ready-mixed concrete, with a 34 per cent market share, but has only 9 per cent of the UK aggregates market. A bid for AI - possibly hostile - would add 12 per cent, taking its share to 20 per cent.