By Jenny Ruth
Wednesday 12th January 2011
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The pain of Fletcher Building's Formica acquisition lingers on, casting its shadow over its takeover bid for Australia's Crane Group, says Nachiket Moghe, an analyst at Aegis Equities Research, which is owned by Morningstar.
“We are wary of this acquisition, given the huge premium paid for what looks like an ordinary asset,” Moghe says. “Crane is currently producing a return on equity (ROE) of barely 5% and through the cycle has generated peak ROE of only 11%. This is hardly inspiring.”
Fletcher Building generates far higher returns, he says.
“Granted, the company wants to grow in Australia but making (an) acquisition for acquistion's sake does not make sense in our view.”
The only good news in the current situation is Fletcher bought Formica at the top of the boom while Crane “would probably be a mid-cycle acquisition. The company did say that 'Crane is not a must have but a good opportunity nevertheless.'”
Fletcher argues Crane is very complimentary to its New Zealand and Australian businesses. The acquisition will increase its gearing from 26% to 33% and still leaves the balance sheet in in good position, Moghe says.
He wonders whether Fletcher can extract savings from using some of its banking facilities which are at a far more attractive interest rate than Crane's.
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