Fletcher break-up talk resurfaces after recent share slump

Fletcher Building chief executive Mark Adamson (right) addresses media during the construction company's half-year results announcement in Auckland. Photo / Dean Purcell

Speculation about a break-up or buyout of Fletcher Building has re-emerged with investment banks said to be working on pitches on the other side of the Tasman, according to an Australian media report.

The Australian Financial Review's 'Street Talk' column today reported that at least three investment banks are seeking a buyer for Auckland-based Fletcher after the shares sank 21 per cent, wiping $1.52 billion from the value of the country's biggest building firm, over unexpectedly weak earnings from its construction division followed by an earnings downgrade. Fletcher shares were recently at $8.02, valuing the company at $5.59b, a discount to Citi research cited by the AFR that puts an equity value of $7.55b, or $10.98 a share, on the building firm.

Rickey Ward, NZ equity manager at JB Were in Auckland, said no-one ever knows whether such speculative reports have any substance, but the share price fall and projected valuations made it more attractive for investment banks to pitch what would be a major deal.

Fletcher shares started dropping in late February when the company's construction division unexpectedly posted weak first half earnings over some problematic projects. The stock took a second dive less than a month later when Fletcher cut its annual earnings guidance, largely because of issues with complex major building projects.

JB Were's Ward said the construction division had, like its rivals, been caught out by a rapid increase in labour costs which led to the downgrades. However, it didn't pass on large benefits to Fletcher's other units and has become a headache for the company, generating just 10 per cent of earnings on 20 per cent of the revenue.

"It's a division in the company that's low margin, but important to win contracts, but it's the one blight on what is not a bad underlying business," he said.

The Citi research values the construction division at $341 million on an earnings multiple of just four times, less than half the 8.1 times multiple running across the entire group.
Fletcher has set up its divisions to be stand-alone businesses, which Ward said means "anything's up for sale when you have a structure composed like that" if it's found to be worth more to someone else than as part of the wider group.

The AFR report speculated a full takeover at a standard premium could cost as much as $8.5b, although it could be done piecemeal. While it remained to be seen whether investment banks could rally up any interest, the AFR said a new entrant to the local building materials market with deep pockets would be a likely candidate.

A full break-up of Fletcher was mooted in a First NZ Capital report a year ago, when the shares were trading at discount of about 25 per cent to the research house's estimates. At the time, First NZ analysts projected several years of growth for the New Zealand operations whereas the Australian and international businesses were seen as being likely to underperform the cost of capital, eroding shareholder value.

Fletcher's only substantial shareholder is US-based fund manager BlackRock, with a 6 per cent stake. The company has 37,630 shareholders, of which the top 100 own 84 per cent.