Boral boss’s call reshaped building giant’s future

Zlatko Todorcevski has endured a rollercoaster first year at Boral with Ryan Stokes now on the CEO’s speed-dial

Zlatko Todorcevski, CEO of Boral, at his Bowral home in the Southern Highlands of NSW. Picture: The Australian/Simon Bullard

Zlatko Todorcevski says one big moment sticks out from his first year in charge at Boral.

It arrived in the form of a phone call from Ryan Stokes on a Monday night in the second week of May, politely giving him the heads up about a $8bn takeover offer that was about to land.

“Oh god, I was extremely surprised,” Todorcevski recalls. “It absolutely caught me off guard.”

Stokes’ Seven Group, the conglomerate controlled by his billionaire father Kerry Stokes, had been sitting on the Boral share register since June 2020 and slowly using creep provisions to build up its stake to 23 per cent.

Then Todorcevski’s mobile rang.

“I had a phone call from Ryan that Monday evening at 7pm. He told me what they were doing and why they were doing it and basically he and I then didn’t talk until the end of the process,” the 53-year old tells The Weekend Australian from his Bowral family home in NSW’s Southern Highlands.

“It probably shouldn’t have been a surprise. They were sitting in that low 20 per cent interest and having just completed a creep. But recognising the potential value of Boral was something they’d clearly done a lot of work on.”

The chief of Australia’s largest building products supplier wasn’t the only one startled.

“The organisation scrambled and I think the board, all of our advisers and the management team did a great job in reacting to that. But it’s something we were reacting to. We hadn’t contemplated that was something that Seven Group was going to do.”

With the initial bid offering no premium to where Boral shares were trading, Seven Group suggested it would be happy with a 30 per cent stake where it could grab added influence over a wholesale turnaround of the company’s operations including a sale of its US building products business.

But in a piece of classic corporate dealmaking, the Stokes camp could smell blood. It charged ahead with a two-tiered bid that quickly saw long suffering shareholders take the cash, winning control for less than a full price.

Todorcevski says the Stokes family and Seven Group deserve credit for their strategy.

“They saw the opportunity, which once again I think a lot of other parties probably saw when the Boral share price was hovering around $2. But to their credit, they took the opportunity and took the risk. Whereas I think a lot of others that I‘ve spoken to since have probably been kicking themselves. So I think they get a lot of brownie points for that.”

Boral’s failure to coax a proper takeover premium led to criticism it had sold the company on the cheap, with Seven now owning 70 per cent of the company.

Despite Boral continuing to oppose the takeover terms, Todorcevski said shareholders were free to judge the bid on its merits.

“We’re in regular contact with all the major institutions around the whole process, and look at the end of the day, a lot of them sold into the offer, but I don’t feel necessarily bad about that.”

“If they’re in a position where they can take a meaningful profit considering the growth in the share price last year, cash in, recognise that, and then sit back and make an alternate decision afterwards, I think that’s completely understandable.”

He shrugs off any lingering tensions with his new chairman, saying the two are now aligned on strategy and putting a war of words down to dealmaking brinkmanship.

“I think a lot of things get said during a process that once you sit back that‘s all forgotten and we’re moving on with focusing on the right thing for the company.”

A changing of the guard with Kerry Stokes stepping down as Seven Group chairman may prove more symbolic than significant for Boral. Todorcevski said he has never spoken or met with Kerry Stokes amid the corporate maneuverings.

While the Stokes buyout consumed plenty of Todorcevski’s time, the early months of his job was focused on boosting flagging staff morale and working out a clear strategy for growth.

Todorcevski winces when recalling the atmosphere at Boral’s Sydney headquarters when he visited for the first time.

“It was not good. I’d describe it as pretty downbeat,” he says. “It just felt like people were really dragging their heels a lot.”

And it wasn’t just the rank and file finding the going tough. Former boss Mike Kane, a combative New Yorker who chased big overseas deals including the $3.5bn US Headwaters deal during his time in charge, said his successor would need “Superman” powers to wrestle the company back to good health.

Todorcevski — who spent two decades with BHP after starting a cadetship at its Wollongong steelworks — who was a far more toned down figure than Kane. He wanted to inspire the company’s 5000-strong Australian workforce and simplify its strategy.

“We’d had the profit downgrades, there had been a lot of speculation about Mike’s future and the outcome of the Headwaters deal. And it was an organisation that had a lot of negative focus on it,” Todorcevski recalls.

“The morning I started on July 1 we had a video call with everybody across the company. I’m always going to be approachable. And I just laid down my vision for the business. I think being open and frank stands us in good stead. Because people feel that although they may not always like the message they’re at least hearing it directly from me before they read it somewhere.”

His handover with Kane consisted of just two phone calls — perhaps unsurprising given what was to follow. Todorcevski gave a hint after declaring there were “no sacred cows” when it came to the company’s assets and from the start Headwaters seemed destined for the chopping block.

“When we did the review — I was going to call it a post-mortem — in my early days on Headwaters, it was pretty clear that yes the businesses were aligned with what Boral already had. But we overpaid for it and I don’t think we fully understood the capability that was required to really execute and integrate that deal very well.”

Asked if Kane fell in love with the wrong deal, Todorcevski draws breath. And suggests plenty of company boards may have chased the wrong target.

“It’s always a risk that you fall in love with a deal and aren’t objective. And I’m not saying that Boral wasn’t objective but I think it’s always a risk. And that’s where frankly it’s a really important role that the board will play in those kind of large transformational transactions to make sure all the risks are understood.

“Every aspect of it’s been challenged and not only do you understand what you’re requiring but you’re very, very clear on how you’re going to integrate it and drive the benefits of that.”

After completing a review, the US building products business was sold in June for $2.9bn with the deal following a $1.4bn sale of its stake in the USG Boral plasterboard, which gave it exposure to Asia. Its US fly-ash business is also now on the market which could bring in another $US1bn, analysts estimate.

Questions still swirl whether the sale of its international assets narrows Boral’s focus too much on an Australian revival.

But Todorcevski counters that it is the right strategy, saying there was little evidence its overseas foray more evenly spread exposure.

“No, I’m not worried about it. If you spoke to Boral before my time, you might have thought about expansion into North America or USG being about diversification or risk management. But we didn’t see that. Where there are countervailing drivers it can work in your favour. But what we saw in 2019 and 2020 was North America wasn’t as strong, Australia was starting to come off and that just exacerbated some of the issues we were facing.

“I would be concerned if the turnaround at Boral was focused on strong volume growth or pricing outcomes but it’s not. This is all about self help and making the business much more efficient,” he says, referencing a $200m-250m increase in earnings by 2025.

Fourteen months in and Todorcevski has weathered the storm. Now for the turnaround with the Stokes camp on hand guiding — and watching — every move.

“Since he became chairman, Ryan and I talk a number of times a week. They see the future vision, and I think we’re completely aligned on strategy. And they understand the portfolio actions were taking, and they’ve really bought into what we’re trying to do to transform the Australian business.”