Brambles under pressure to sell North American unit

The North America business is thought to represent about half Brambles’ value and the CHEP pallets business that operates in the Americas made $US231m of underlying profit. Picture: Bloomberg

Brambles is facing growing investor pressure to embark on a strategic review that could result in the $15bn logistics company offloading its North American division to private equity.

While Brambles has said it had not received any approaches from prospective buyers, some believe a major US-based firm like Kohlberg Kravis Roberts could be interested in the North America arm, although KKR itself is said to have its attention elsewhere, not on Brambles.

Shareholders have been unhappy with the performance of Brambles, which is trading at lower levels than it was in 2019, and some are now thought to be keen for a break-up.

Boral faced investor pressure after its 2016 acquisition of the US-based Headwaters business for $3.5bn that failed to fire.

One investor, John Wylie, made efforts to find a buyer for parts or all of the business in 2019 before the Kerry Stokes-backed Seven Group started amassing shares.

Boral sold its US division last year to Westlake Chemical for $US2.15bn and the Australian operations are now under Seven’s control after Seven succeeded in a takeover attempt.

It also sold its US-based fly ash business in December to Eco Material Technologies for $1bn.

For the six months to December, Brambles faced inflationary cost pressures amid the pandemic that caused disruptions across supply chains.

It posted a $US304.8m profit after tax, up 4 per cent on a constant-currency basis.

For the full year, it expects its underlying profit to grow at 3-5 per cent on a constant-currency basis, including $US50m of short-term transformation costs.

The North America business is thought to represent about half Brambles’ value and the CHEP pallets business that operates in the Americas made $US231m of underlying profit.

The company has always been thought to be a logical target for private equity, but the challenge has been its size, although a $7bn deal would be more digestible.

Brambles faces the prospect of spending about $700m in the US to invest in plastic pallet capabilities if it wants to retain Costco as its customer.

Costco brings in about 10 per cent of the US revenue for its CHEP business and it says it wants to transfer to plastic pallets from wood.

Food suppliers are increasingly using plastic pallets, and Brambles provides wooden pallets to its customers.

With the US business not paying free cashflow, a private equity firm would need to fund this capital investment if it was to buy the unit.

Analysts are less keen for the company to embark on a sale of its North America division, with one saying the group would be selling growth.

Brambles is already 50 per cent-penetrated in the US and they believed a divestment would be an “admission of failure”.

They believed some shareholders wanted Brambles to turn the business around so its performance would improve.

Brambles has already offloaded all its non-core assets other than logistics, including its operations such as its shipping business, and all that is left to divest is its core business.

Investment bankers have pitched the idea to Brambles of selling North America before.

Normally, if a company was planning to sell off a division, it would run a dual track process, but listing the unit on the US sharemarket would not be a valid option. If it was, this move would create competitive tension with buyers.

It is worth noting that Brambles boss Graham Chipchase started at the company in 2017 and his time could soon be up, so perhaps it would be new management that would consider a review.