REACTIONBrokers believe the deal offers savings and cross selling opportunities from the merged entity, writes Fiona Redden

BROKERS IN Dublin have welcomed the merger of Iaws and Hiestand and the subsequent creation of new group Aryzta, but in Zurich the response has been less favourable.

Iaws is the Irish maker of Delice de France bread. The deal will create the world's biggest maker of frozen baked goods.

"It's a deal that's been waiting to happen for some time," said Liam Igoe, an analyst with Goodbody Stockbrokers. "Overall it is a good deal but it certainly wasn't cheap. Iaws will have to extract value from the business by being able to drive it forward and maximise synergies in terms of manufacturing facilities and product sourcing," he added.

Hiestand has been trading at a premium for the past six months or so, at 20 times price/earnings, but has fallen back from the high of 2,870 Swiss francs (€1,786.10) reached on January 24th. Igoe said Iaws had been keen to do the deal, but had waited for Hiestand's share price to fall.

Paul Meade, an analyst with NCB Stockbrokers, said the deal offered strong earnings momentum from the combined entity, given their respective earnings growth trajectories and the strategic fit of the combined businesses from a product, geography and management perspective.

The brokers also approved of Iaws' funding method. "Funding with paper rather than debt gets over a couple of hurdles and leaves the new entity in a good financial position," said Igoe, with Meade agreeing, "The deal has no additional leverage risk and offers savings and very strong cross selling and growth opportunities from the merged entity."

Meade also said the deal significantly reduced the risk to earnings from dollar and sterling exposure for Iaws shareholders.

The planned delisting of Iaws from the London Stock Exchange and the listing of the new entity, Aryzta, in both Dublin and Zurich, shouldn't have that much of an impact say brokers, but it may lead to somewhat less coverage for the stock. Following the announcement of the deal, Iaws shares jumped to almost €17 in Dublin before falling back to €16.50 by closing time, representing an increase of 2 per cent on the previous day of trading.

In Zurich however, Hiestand fell by almost 9 per cent, down to SFr1,825, amidst concerns over the low price offered to its minority shareholders.

Jon Cox, an analyst with Landsbanki Kepler in Zurich, Switzerland, acknowledged that the deal was good for Iaws and Lion Capital, but he said the merger was a "bum deal" for minority shareholders of Hiestand, who were offered over 10 per cent less per share than Lion Capital.

Igoe says that if Aryzta can double its earnings per share within five years, as it plans to, then the future looks rosy.

Assuming a 15 per cent growth in net income to July 2008, Meade predicts Aryzta will have a net income of €166 million.