Boral cashes up into an ‘interesting’ week

Boral is selling its Noth American building products arm.

I doubt that Seven Group CEO Ryan Stokes really had his heart in it – attacking the $3bn sale by Boral of its US building products business.

Secretly, he would have been – he really should have been – chuffed, for the sale really worked to Seven’s advantage in its pursuit of creeping control of Boral.

As such, the sale actually “announced” two things.

First, that Boral board and management were making decisions in the best interests of the company, as they see it.

They had decided to sell, significantly backtracking on the major – and bold – expansion play of former CEO Mike Kane; they persisted with it; and when the right price arrived (again as they saw it, but also other potential buyers, judged by their lower offers) they accepted.

Even though the acceptance – and more particularly the $3bn in cash – rendered Boral more vulnerable to Seven rather than less.

With interest rates near zero and asset prices at extraordinarily high levels, this is not the time to have a balance sheet awash with cash.

Boral has to find something to do with the cash and that ‘something’ spells capital return; which, one way or another, would work to boost Seven’s equity in Boral without Seven having to spend a penny of its own money.

And if Seven did still spend the money it’s allocated for its “super-creep” from its current 24 per cent to its intended 30 per cent; why then, it could end up with, say 35 per cent-plus of Boral instead at no extra cost.

As a general proposition, subject to clear evidence to the contrary, you have to accept that company boards do make decisions in the best interests of the company, as they see it.

This goes not just to Boral’s basic decision to quit the US, but also its timing, how it ran the sale and the price it accepted.

The decision was effectively validated by independent expert Grant Samuel stating that the $US2.15bn ($2.87bn) sale price exceeded its $US1.8bn-$US2bn valuation range.

I might note that the Boral statement had a really weird references, that the change of ownership “will support the prospects for our North American building products business”.

Our North American…..? Doesn’t Boral understand what it means to sell something; it’ll no longer be its business; so what the hell does it matter to Boral shareholders how it now goes?

What does matter to them is what Boral does with the cash.

Splashing it around in a major acquisition is just not on. In general terms Boral has given no indication of a strategic acquisition imperative; and, specifically, this is an expensive time to be buying.

That leaves a capital return, which would be music to the ears of Seven and Stokes.

They have long used capital returns very effectively to ‘super creep’ to bigger stakes, and control, in partly-owned companies, including Seven Group itself.

Surely the Boral board knows that? This strengthens the conclusion that rather than a move to fight off Seven, the sale was rather more a recognition of the inevitable Stokes and Seven creep to control - and it’s now all about price and that price will effectively be set by the pricing of a Boral capital return.

That, and Wall St.

As so often happens, “events” can erupt out of left field.

A week ago, Seven’s $6.50 open-ended but under-market offer for Boral was going nowhere. Seven had to balance upping the bid and risk getting too many shares.

Then came the Fed statement and Friday’s sharp drop on the Street.

Yes, Boral closed Monday at $6.87, still above the offer. But we are all in for an “interesting” week.

If Wall St is headed for a sustained drop, both Boral and Seven could be buying Boral shares cheaper.