Analysts are divided about Fletcher Building's proposed $282 million takeover of Steel & Tube: one cautiously supports the deal but is worried about potential hurdles like the Commerce Commission, another robustly opposes it for three reasons and a third says it will be strategically positive.
"Is it a deal, is it a steel?" ask Matt Henry and Matt Dunn of Forsyth Barr, roundly supporting the hostile bid, opposed by the target company's board. Forbar supports the takeover as "probably the most logical and lowest risk opportunity for it to consider".
But UBS is against it, saying it is "un-intuitive" for three reasons:
1. Fletcher should focus on its sprawling operations before it looks to increase its footprint;
2. The $282m price would consume about a third of the UBS's estimate of available funds and reduce the flexibility to gain scale in Australia;
3. The takeover share price high, at 44 per cent premium to Steel's average market capitalisation in the past three years, suggesting a high price earnings multiple, "a 16 per cent premium to FBU's multiple. In our view, investors would be excused for asking why buying back shares is not a better use of funds".
Citi analysts said the deal would be "strategically positive" for Fletcher. "STU is a leading secondary processor and distributor of processed steel in NZ. The acquisition of STU is consistent with FBU's five-year strategy announced in June, providing an opportunity to create the leading steel distribution business in the NZ market," Citi's report said.
Forsyth Barr is the most supportive: "While we believe Fletcher's proposal to acquire Steel & Tube is strategically rational, our enthusiasm is constrained by the transaction's numerous hurdles ahead, modest materiality and the company's chequered execution history. For Steel & Tube, we view the offer price as fair, balancing compensating investors for a significant portion of the company's upside ambitions with the associated high execution risk."
Commerce Commission clearance was a key uncertainty, it said, expressing some surprise that the takeover came not long after Ross Taylor was appointed Fletcher chief executive, not long after a major equity raising and a divisional restructuring.
Forsyth Barr described the timing of the takeover as opportunistic and it raised historic concerns.
"While we recognise Fletcher's history on acquisitions is very poor, in our view, Steel & Tube is probably the most logical and lowest risk opportunity for it to consider — it is New Zealand based, Fletcher knows the company and industry well, and the synergy opportunities are likely considerable. We believe Fletcher is likely the highest value owner of Steel & Tube," the Forbar analysts said.
"We expect the potential synergies are likely considerable across opex savings, procurement scale, lower inventory levels, and potential revenue and margin benefits. Offsetting will be some revenue losses — at very least there will be customers who are currently supplied by FBU and STU who want to maintain dual supply, plus competitors will see the combination as an opportunity to take share."
Mark Malpass, Steel & Tube chief executive, acknowledged the company's market capitalisation had risen from about $210m to $263m since Fletcher's bid.
But he reiterated the board's opinion that the $1.70/share offer significantly under-valued the business which had been trading around $1.83 till May when a write-down was announced.
"Fletchers are trying to take advantage of a weak spot," Malpass said. Shareholders got a letter this month telling of good progress and many initiatives underway including new investments, technology upgrades, expanded product lines and further staff training.
Malpass said shareholders would get a trading update for the June 30, 2019 year at the annual meeting at Ellerslie at 2pm on Thursday October 25.
He is a former Fletcher divisional chief, so asked how it felt to be on the other side of a deal with his ex-employer, he said: "I got to see Steel & Tube as a competitor and I could see what a great company it was. I love the company. It's a great company. We're doing everything from bridges to affordable housing. The market has under-valued the company."