Thursday 25th October 2018
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Steel & Tube considered bidding for Fletcher Building's steel and reinforcing businesses earlier this year but concluded such a bid would take too long and could struggle to gain permission from the Commerce Commission, says S&T chair Susan Paterson.
Speaking directly to shareholders for the first time since the board rejected a non-binding, indicative takeover offer from Fletcher earlier this month, Paterson revealed "when Fletcher Building had bank covenant issues earlier in the year we looked at the possibility of offering to help by acquiring their EasySteel and Reinforcing business", she said at the annual meeting in Auckland. "We could see the synergies they no doubt see".
However, S&T feared it would lose customers over the 12 to 18 months that a commission clearance process could be expected to take, even assuming the competition watchdog cleared a proposal that would have given the combined entity more than 50 percent of the market in several key areas of steel products used in the construction and infrastructure sectors.
It was common practice for customers to take steel products from more than one supplier to maintain competitive tension and there was a risk that customers taking supply from both S&T and Fletcher would choose a third party supplier while the bid proceeded.
Paterson's comments prefaced a further explanation for the S&T board's rejection, earlier this month, of a takeover bid from Fletcher that was pitched initially at $1.70 a share, and subsequently raised to $1.90 a share. The Fletcher scheme of arrangement structure was unveiled at a time when S&T had recently raised capital in a deeply discounted offer at $1.15 a share and the shares had been trading at $1.34 immediately prior to the Fletcher offer.
Some institutional shareholders criticised S&T's swift rejection and failure to seek an independent valuation report, after Fletcher abandoned its bid in the face of the S&T board's valuation of the company's shares at between $1.95 and $2.36 per share.
One shareholder told Paterson he viewed the board's actions in keeping the Fletcher bid secret for 23 days as "despicable" and asked how First NZ Capital value the shares at around twice the value used in the capital-raising, when the investment advisory firm was the advisor in both circumstances.
However, the chief executive of the New Zealand Shareholders Association, Michael Midgley, defended the board, saying there had never been a concrete offer from Fletcher that could have been put in front of shareholders and that he intended to vote proxies held by the NZSA in favour of Paterson's re-election at today's meeting.
Paterson said the existence of the proposal was only made public when it became aware that Fletcher "was selectively approaching some of our institutional shareholders".
The board had just determined on Oct. 12 that the Fletcher bid was strong enough to engage an independent valuer, but then Fletcher had "made a surprising decision to withdraw their offer".
"If it believed its revised non-binding offer was fair value, Fletcher Building should have awaited the results of the independent expert valuation report."
Milford Asset Management, which had built much of its 15.8 percent stake in S&T in preceding weeks, subsequently sold its stake to Bluescope Steel, owner of NZ Steel and Pacific Steel, in what is seen now as a blocking holding for the Australian-listed steel manufacturer.
"Bluescope are supportive of our company and our strategy and have publicly said they have no intention of taking over Steel & Tube," said Paterson, who said the company was now well into a turnaround strategy.
Chief executive Mark Malpass reaffirmed earnings guidance of $25 million earnings before interest and tax in the current financial year, with most of that appearing in the second half, rising to $40 million in the 2021 financial year.
While the results in the last financial year were disappointing and included trouble with a major IT project and $23 million of inventory writedowns, "we are now moving forward under our new strategy, with a clean P&L and balance sheet", he said.
He noted that steel prices had been rising in the last two years "and are currently at some of the highest prices we have seen since 2014, particularly when the softer NZ dollar is taken into account", with direct impact on S&T margins.
To counter that, the company was seeking to pass through price changes on finished product prices as they occur, within the constraints of competitive market forces.
"Demand for steel in New Zealand remains high, correlating with global demand trends as countries such as China invest into large infrastructure projects," Malpass said.
In a dig clearly aimed at Fletcher, Paterson told shareholders that S&T was "the only NZX-listed opportunity for shareholders to invest in the New Zealand steel industry without the additional risks of a conglomerate operating multiple businesses across a number of sectors in both New Zealand and offshore".
She also gave a fulsome apology for the fact that the company was awarded a record $1.9 million fine for wrongly certifying steel mesh products, which she said was an "unintentional, historical breach" that was covered by insurance.
She was "very concerned" that class action litigation funders were attempting to find backers for further action. The certification issue had "no material impact on mesh performance" and there was "no reason people should be concerned".
S&T shares fell 2.2 percent to $1.33 in trading on the NZX today, consistent with widespread falls in share prices across the local bourse.
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