Banker Berg makes big play at Boral

By Giles Parkinson

Sydney View

It is suggested Boral overbid the acquisitive gas utility AGL by around $A160 million.

After nearly five years of playing with bricks and mortar at one of the country's largest building groups, Boral boss Tony Berg has finally made the big play that he hopes will restore the fortunes of what was once one of Australia's premier blue chip stocks.

After more than a year of trying, Berg last week pulled off a major purchase when Boral and its energy offshoot, Envestra, agreed to pay a hefty $A1.67 billion ($1.97 billion) for two gas retail and distribution businesses in Victoria.

Berg's transition from the banking industry has been more problematic than he would have expected, and this move to place a third of Boral's assets in the energy industry may not be his last roll of the dice, but could be his most important.

There are just two months left for Berg to achieve that rash and much regretted prophecy of early 1994 that he would double shareholder wealth within five years.

He won't make that by a long shot - the falling share price and the cut in the dividend has actually reduced shareholder wealth since his appointment - but Berg insists he's not about to give up.

Fortunately, his board has been a lot more understanding than the market about his problems, and early in 1998 he was given another five years to deliver the goods, which he now rather more cautiously describes as creating a high performance company that can provide investors with "reasonable" rates of return.

A large part of that strategy is based on energy, and gas in particular, and was the reason behind the creation and stock market float of Envestra, in which Boral maintains a 19 per cent stake.

Envestra's returns to date have been pretty ordinary, and until last weekend its attempts to buy new assets had been thwarted by aggressive and deep-pocketed Americans.

The auction of the last of Victoria's power utilities was virtually the company's last chance to get its hands on a gas asset of any consequence, and its desperation showed in the price.

According to one analysis, the $A1.67 billion purchase is about 10 per cent above the going rate for equivalent gas assets.

This analysis is supported by suggestions that Boral had overbid the acquisitive gas utility AGL by around $A160 million.

But this could be where Berg's true talent may finally come to the fore.

Those that doubted the ability of a banker to create wealth out of bricks and cement have not been cured of their scepticism, but Berg's forte has always been in financial engineering.

That is how he made his reputation at Macquarie Bank and it seems that is how he proposes to make the purchase of the Status/Energy 21 gas assets a success.

Under the deal, Envestra will pay $A1.196 billion for the Status Networks distribution business while Boral will pay $A443 million for the Energy 21 retail business.

Boral says the prices paid equate to 14 times EBITDA (earnings before interest tax, depreciation and amortisation), which is high by industry standards.

But it argues that the capital structure it has implemented at Envestra and the structure of the Victorian gas purchase allows Boral to transfer tax losses from Envestra and make the purchase earnings per share positive from day one.

This has resulted in Boral getting its first earnings upgrade for many years, helped by an expected fall in the group's effective tax rate to below 30 per cent.

Even so, the deal has not exactly set the market on fire, but it has focused their attention, and some broking houses such as Merrill Lynch have upgraded their recommendations to long-term accumulate from neutral.

The reason for the caution is that there are several elements of risk.
Envestra will need to raise around $A300 million of equity to fund its purchase of Status, and the market does not seem to be very comfortable with that.

Also, low margins in the gas industry will be under pressure as the privatised utilities start to compete more aggressively.

Berg has suffered a lot from the rash predictions he made when he made the leap from banking, but most people, particularly his board, reckon he has done well in tough times.

They argue that in the face of the savage building downturns that have plagued Boral's operations in either Australia or overseas, his careful attention to detail, and to costs, have carried the company through in reasonable shape.

That reshaping of the building and construction divisions will be tested to the full in the next few years, with non-dwelling construction expected to decline by 15 per cent or more.

It is then that Berg's true colours will be flying for all to see.

* Giles Parkinson is deputy editor of the Australian Financial Review.