Shares in heating and plumbing business Ferguson (FERG) ticked up 0.3% to £89.08 in early trading after it announced it had sold off its low-margin UK subsidiary to a US private equity firm to focus on the North American market.
Investment company Clayton, Dubilier & Rice is paying $420 million or £308 million in cash for the Wolseley UK distribution business, while Ferguson will retain liability for the defined benefit pension scheme which was in deficit by $27 million at the end of July.
The UK business turned over $1.88 billion of revenues in the year to last July but made just $8 million in full-year pre-tax profits out of a group total of $1.26 billion after extraordinary items, so the impact of the disposal on group margins and earnings going forward should be positive.
The deal is expected to complete by the end of this month, after which the company will update shareholders on its plans for the proceeds, although according to today’s statement the current intention is to return most of it by way of a special dividend.
Chief executive Kevin Murphy commented: ‘The transaction simplifies the group and allows us to focus entirely on investing in and developing our business across North America where we have the greatest opportunities for profitable growth.’
As Numis analyst Christen Hjorth pointed out last month on the release of the first quarter results, while Ferguson shares have performed well over the past year they still trade at a valuation discount to those of their peers in the US distribution sector.
With the disposal of the UK business and an acceleration of M&A in the North American market, earnings forecasts are likely to rise which should continue to underpin the shares.
