Analysts put Fletcher's $1b bid under the microscope

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Fletcher Building's A$740 million ($989 million) Crane Group takeover will benefit shareholders in both businesses, three analysts say.

Rob Mercer of Forsyth Barr in Wellington and Emily Behncke and John Hynd of Deutsche Bank in Sydney outlined benefits although Morningstar's Nachi Moghe in Auckland condemned the deal.

All have now produced extensive commentaries, allowing professional investors an insight into its potential benefits and drawbacks.

Mercer, Behncke and Hynd rate Fletcher as a "buy" stock. Mercer projected $396.4 million net after-tax profit in 2011, rising to $498.8 million by June, 2013.

The offer, which will give Crane shareholders a combination of scrip and cash, will improve the balance sheets and returns of both businesses, say Mercer, Behncke and Hynd.

Mercer said Crane's costs would be cuts and its extensive New Zealand businesses improved.

"Crane earnings in 2010 under-performed due to virtually zero earnings from its trade distribution business in New Zealand, despite having revenue of $375 million and a 25 per cent decline in revenue from its pipelines division. We believe Fletcher can bring some easy gains to Crane, mainly through lowering corporate overheads, reducing the cost of funding and improving the earnings for Crane's New Zealand trade distribution business," Mercer said.

Behncke and Hynd predicted Fletcher could transform Crane.

"We think Fletcher's business management should offer some good strategic direction for Crane. Assuming the transaction is successful, this would mean Fletcher's Australian revenue exposure is greater than New Zealand at 45 per cent versus 42 per cent respectively," they said.

Savings of about $15 million are possible if the takeover succeeds, they predicted, due to synergies.

Morningstar's Nachi Moghe criticised the deal.

"We are wary of this acquisition given the huge premium paid for what looks like an ordinary asset. Crane is currently producing a return on equity of barely 5 per cent and through the cycle has generated peak return on equity of only 11 per cent. This is hardly inspiring. Fletcher generates far higher returns than that. Granted, the company wants to grow in Australia, but making acquisition for acquisition's sake does not make sense in our view," Moghe said.

"The debilitating acquisition of Formica is still fresh in the minds of investors. The pain of that acquisition lingers on. The only good news, if there is any, is that unlike Formica, which was bought at the top of the cycle, Crane would probably be a mid-cycle acquisition," Moghe said.

The market expects the deal to go ahead and Fletcher has argued how Crane is very complementary to its businesses in New Zealand and Australia, Moghe said.

The deal is likely to be earnings per share accretive to Fletcher in the very first year and will result in gearing rising from 26 per cent to 33 per cent.

That still left Fletcher's balance sheet in a good position, Moghe said.

Fletcher shares closed up 1c yesterday at $7.73.

FLETCHER BUILDING

Good news

* Leading Australasian building materials producer.

* Strong brands in its fold, with a healthy balance sheet.

* This is despite the purchase of Formica.

* NZ state spending unlikely to abate.

Bad news

* Aust/NZ housing markets to undergo price corrections.

* American markets will stay depressed, with tight credit conditions remaining.

* British and Spanish housing markets will hurt Formica earnings.

* Building products distribution market extremely competitive.

Source: Nachi Moghe, Morningstar