Soul Patts lowers the defences with $14bn Brickworks merger

Left to right, Soul Patts chairman Robert Millner and chief executive Todd Barlow. Picture: Hollie Adams

The $14bn merger of Soul Patts and Brickworks means both companies can finally become a takeover target with its cross shareholding structure until now being the iron-clad defence to keep predators at bay.

While it’s infrequently that the Australian Securities Exchange sees an inbound offer for a company worth as much as $14bn, in the past it was always out of the question that either Brickworks or Soul Patts could be a taken over, because Soul Patts owns about 43 per cent of Brickworks and Brickworks about 26 of Soul Patts, and both parties would vote a deal down.

A motivating factor for the merger will no doubt be index inclusion and attracting passive funds due to its scale, boosting its market value.

Passive funds, where stock selection is computerised automatically, buy into a stock when it reaches a certain scale.

But it also does call into question whether this is also part of the company’s succession planning.

Chairman Robert Millner has been a director since 1984, and turns 75 this year, and while his son, Tom, is a New Hope director and was previously on the Soul Patts board, perhaps it’s a way to create the option of a liquidity event in the future in the case of a carve up of the Millner family’s $1bn-plus private fortune.

Mr Millner is the great-great-grandson of founder Lewy Pattinson, the Australian businessman who in 1903 floated a Sydney pharmacy business founded by Caleb Soul in what was the origins of Soul Patts.

The company has grown through the Great Depression and two World Wars into the public conglomerate that previously rebranded from Washington H Soul Pattinson, which has owned businesses ranging from coal mines to chemists.

And the family has prided itself on the fact that the company has never borrowed money and never missed a dividend payment, even during The Great Depression and when his uncle Jim Millner was a prisoner of war in Singapore during World War II.

It’s an old school and commonsense approach that has appealed to plenty of investors.

But some institutional investors have been fierce opponents of the Soul Patts cross shareholding structure for years, with Perpetual being the most vocal about it and launching an investor activism campaign in the past to challenge it.

With this deal, the institutional investors who avoided the stock for that reason can buy in.

Also, with Soul Patts being the 39 per cent owner of New Hope Coal, the transaction dilutes the coal exposure overall, which also could have been a deterrent to some institutions with concerns about the impact of burning coal on the environment.

Both Brickworks – the country’s largest brick and tile manufacturer and a property investor – and Soul Patts have a huge retail investor following, drawn by the company’s stellar track record of ever-increasing dividend payments over 30 years in what has been a stand out investment for retail shareholders.

This deal will not deter them, if anything it’s a win, as coal exposure is reduced and everything is under one roof.

They will not mind paying for the cost of managing their money, which a number of institutional investors do themselves, and it provides access to a diversified investment house with a total portfolio net asset value of $11.8bn in one hit.

Both Brickworks and Soul Patts rallied on Monday’s announcement for the merger which valued Brickworks shares at $30.28 each, a premium of about 10 per cent to the last closing share price.

Soul Patts, Brickworks and “TopCo” shareholders will get 72 per cent with the final details of the corporate structure still being nutted out.

The development marks the end of an era in corporate Australia, where the last major corporate with a cross shareholding disappears.

The last was Amcor with its Mayne Nickless (now Mayne Pharma) cross shareholding that disappeared in the 1990s.

As part of the transaction, where a new top company will be created to own both Soul Patts and Brickworks, which is advised by Citi, investors were asked to buy shares worth $550m at $36.93 each in an equity raising handled through Aitken Mount Capital Partners.