Fletcher Building launches rights issue, placement to secure $NZ700m

Building products group Fletcher’s raise will drive down debt and fix its balance sheet.

It’s no wonder Fletcher Building’s $NZ700m equity raising on Monday was overwhelmingly popular, given that the stock is being sold for less than what the group would theoretically get back if it broke up the business and sold off all the assets.

The Jarden-advised placement of $NZ282m and $NZ418m in a one for 4.49 pro rata accelerated non-renounceable entitlement offer was at $NZ2.40 per share, 17 per cent lower than the closing price on the NZX at $NZ2.89 on Friday (it closed at $2.60 on the ASX). It is a 12.9 per cent discount to its theoretical ex-rights price.

At June, its net tangible assets value was $NZ2.97.

The offering price is also close to half the price the shares were at a year ago – $4.32 on the ASX – and lower than the $3.89 they was trading at in February when the company dismissed suggestions it was raising equity, or considering a raise.

Some analysts had been telling the market for months that the company did not have enough funds and needed to tap the market, and many believe that the group has left it too late, with its net debt close to its market value of $NZ1.8bn with the inevitable move priced in.

While it may have been able to navigate the difficult building market conditions, if they deteriorate further it will be in a tight position, and may have to sell assets at steep discounts.

In May, Simon Mawhinney, the managing director of Fletcher Building’s largest (14.1 per cent) shareholder, Allan Gray, said he did not believe a raise was necessary.

“Ideally, we could have avoided this,” he told DataRoom on Monday, adding that Fletcher Building needed to focus on running the business, as well as operational efficiencies.

“Capital allocation is important for this company. They have been poor at it,” he said.

Mr Mawhinney said that Allan Gray was keen to take up as many shares as possible in the placement, which is set to be heavily bid for by institutional shareholders.

Those shareholders are less keen to sub-underwrite the retail offering shortfall for fear that the stock trades strongly and there’s no take-up.

Fletcher Building shareholders and analysts say that the group is under new management, led by former Fletcher Building and Carter Holt Harvey executive Andrew Reding, and they are sanguine about its future with the New Zealand reserve bank now cutting interest rates.

But some believe the market there, which is currently bleak, could still take some time to recover, and if the stock trades down after the raise, it may pave the way for a takeover bid, although that would probably be dismissed as opportunistic.

Fletcher Building is listed on both sides of the Tasman and owns at least $NZ1bn of development land in New Zealand, where it has a monopoly position with some building material business units.

Its best businesses include insulation, New Zealand’s Golden Bay Cement, Placemakers and Laminex in Australia.

But some say that while it operates well in strong economic conditions, its high corporate costs means it suffers sharply in a downturn, and with the chief executive sitting over business units run by separate executives, it can take some time for bad news to filter through, creating last-minute market shocks.

Of its 25-odd business entities, some like its Stramit steel manufacturing unit are seen as non-core and will likely be sold, among others like Iplex, for which the group has made a $NZ155m provision for pipe failures in Western Australia – higher than initially flagged.

Tradelink in Australia was sold for $170m. Former company boss Ross Taylor opted to raise $NZ750m of funds in 2018, just after being appointed, when the group faced construction project cost blowouts and had high debt.

At the time, Fletcher Building sold shares at $NZ4.80, a 23.4 per cent discount to the last closing price of $NZ6.27, in a deal that was carried out by Macquarie Capital.

In August, Fletcher Building confirmed DataRoom reports on July 29 that a capital partnership or joint venture was being explored for its residential development land, which would net $500m, but it had been struggling to find a buyer.

Fletcher Building has suffered losses, profit downgrades and cost blowouts on construction projects amid a tough market and a weak New Zealand economy.

Various directors and members of senior management have left, including its former chief executive Ross Taylor and chairman Bruce Hassall.

Of the $NZ180m of cost savings flagged this financial year, $NZ120m have already been taken out of the business.

In an announcement to the ASX, Fletcher Building said the raise was being undertaken as “a prudent measure to strengthen the company’s balance sheet and improve financial stability and resilience in the current challenging environment”.

It would allow the company to focus on operational performance while market conditions eventually recovered, preserved options in relation to its portfolio and reduced short-term pressure to realise assets at below intrinsic value.

Other groups that have dismissed equity raisings and then later moved to tap the market in the past year include Bellevue Gold, Select Harvest and Healius, while Star Entertainment, Tabcorp and Lendlease are all expected to need more equity from investors in the months ahead.