Friday 13th April 2018
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Fletcher Building shares jumped 13 percent after the Sydney Morning Herald reported that Wesfarmers has acquired a small stake in the company in a possible precursor to a full takeover.
Fletcher rose 75 cents to $6.59 on the NZX having sunk to its lowest levels in almost six years last week. The SMH cited sources close to Wesfarmers as saying it had bought between 3 percent and 4 percent of Fletcher. That would amount to up to about 27.9 million shares. There have been no trades of that size this year although a stake could be built up gradually.
Investors said there's no sign of a large buyer in the market and it isn't clear whether the report is correct although it could make strategic sense for Wesfarmers which acquired the struggling Coles Myer business in 2007 as a turnaround target.
Wesfarmers acquired Coles along with Kmart, Target and Officeworks for A$22 billion in 2007 and the supermarket chain now makes up about a third of its earnings. At the time of the acquisition, Coles had been losing market share and facing declining sales and earnings. Wesfarmers had picked up a small stake in the business ahead of launching a takeover. Last month, Wesfarmers managing director Rob Scott announced plans to spin off Coles, which had been transformed into "a mature and cash-generative business".
"Conceptually for Wesfarmers could it make sense? Absolutely," said Matthew Goodson, managing director at Salt Funds Management, which oversees more than $1.6 billion of shares in Australia and New Zealand. "Coles Myers was a large business with temporary issues. Fletcher is in the same position in a broad conceptual sense."
Fletcher stock has dropped about 18 percent in the past 12 months, shrinking its market capitalisation to about $4 billion, although Goodson said an actual takeover valuation "would have to be based on the fundamentals of the business" rather than the recent selloff, which has been partly driven by speculation it could fall out of the MSCI Global Index at the next review, when a2 Milk is expected to join the benchmark.
Fletcher slumped to a $273 million loss in its first half, driven by losses at its Building + Interiors unit, and chief executive Ross Taylor has embarked on a strategic review of the entire company, with details to be announced in June. It had to get waivers from lenders after breaching covenants and is still in talks with its US noteholders and bank syndicate to negotiate new lending terms.
That's led to speculation the company could shed non-core businesses although Taylor has said the problems are largely confined to B+I and the remainder of Fletcher's building products, distribution and construction units are performing to budget.
"Fletcher's balance sheet issues are only really confined to this year. Their gearing returns to supportable levels in coming years," Goodson said. Fletcher arguably has "a somewhat messy collection of businesses" but it could remain as a strong, stand-alone company, he said.
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