Ryan Stokes bids for Boral: Why this time is different

A reinvigorated Boral stands to deliver more for Seven, but the question is whether smaller shareholders will want to come along for the ride.

Ryan Stokes, CEO of Seven Group Holdings Limited, is bidding to take Boral wholly private. Picture: Britta Campion

Ryan Stokes is firmly in the driver’s seat in his long-running move to secure Boral, although this time he is leaving little for chance in the $3.1bn play to mop up minority holders of the cement and asphalt play.

Stokes has to pay up to buy out the remaining 28.4 per cent, in a move that speaks volumes about the evolution of his industrial conglomerate Seven since he made an audacious bid for control of Boral three years ago.

That earlier campaign topped out at 70 per cent and delivered Stokes the Boral chair, and he has since used his majority holding to put his mark on the long-underperforming company, from installing his hand-picked chief executive Vik Bansal to exiting marginal businesses.

These efforts have started to come together, with Boral this month smashing profit expectations and upgrading its full-year outlook. Moves including product pricing increases and more management discipline have also helped back a share surge for Boral, which is now trading at a hefty price-to-earnings premium to the broader S&P/ASX 200 and is sharply above its defacto parent Seven Group.

In essence, the recent surge in Boral means Stokes is bidding against himself. He is now forced to pay top dollar at $6.25 a share, compared to a pre-bid price of $5.84 — mostly funded by his Seven Group shares — in order to finish the job.

He started the process three years ago, remarkably moving to a super majority through the launch of a nil premium bid of $6.50 a share, taking on a company that at the time was just a touch smaller than his Seven Group.

At the time, Seven’s offer for Boral’s shares was pitched at 22 times price-to-earnings, while the latest offer represents more than 24 times.

Boral these days is a much smaller business following billions in assets sales, including the long-troubled $3bn US operations as well as plasterboard, bricks and Australian timber. Much of these proceeds have been returned to shareholders for cash, helping to pay for Seven’s earlier buyout.

To help move the dial in the face of the conglomerate discount, the Stokes camp is pointing to a long track record at Seven. Picture: Britta Campion

Stokes thinks there a lot more to come in the broad-based recovery of Boral and he wants that benefit to also go to his Seven Group. He is betting that moving to full ownership of Boral and access to its full free cashflow will go some way to narrowing the discount gap between Seven and the S&P/ASX 200.

Indeed it is this discount that is a source of deep frustration inside Seven. The industrial trades on a multiple of 16.7 times compared to the broader S&P/ASX 200 at 20 times and Stokes feels that his WestTrac and Coates Hire businesses deserve a premium given their track record of consistent returns.

He is betting Boral will add to the premium portfolio of Seven’s businesses and tilt the scales for a re-rating. It also give Seven more growth options allowing it to borrow against the cash generated by the materials player.

The scrip proportion of the Seven bid represents 76 per cent. In essence, the Boral minority shareholders now need to weigh up whether their higher-priced shares are best folded into the discounted Seven Group.

Carrot vs Stick

Stokes is offering a carrot to neatly clean up the Boral minorities – many of whom are likely to already be shareholders in Seven Group.

This involves a step-up in cash on offer if Seven moves past 80 per cent threshold and then another if it secures the critical 90 per cent-plus mark, allowing it to move to compulsory acquisition. The maximum consideration of $6.25 a share values Boral at $6.9bn.

The big stick — if the offer falls short — involves Seven agitating for more proportional representation on Boral’s board than the current two seats.

It will also continue to push for Boral’s free cashflow to be reinvested to support long-term growth. Stokes will also flex his 70 per cent stake, stating Seven’s intention to eventually delist Boral — and this could leave those holding out for more stranded in an illiquid stock and at the mercy of Seven.

Stokes has already declared the offer best and final and it will not be increased.

To help push things along, the Stokes camp is pointing to a long track record of Seven delivering fully franked dividends, market-beating earnings growth and market-beating total shareholder returns.

Boral trades at a premium to parent Seven Group and this means Ryan Stokes will be forced to pay up to buy out the minorities. Picture: AAP

A multi-headed business like Seven is less leveraged to the construction cycles, while Stokes intends to keep his hand-picked Boral chief executive Vik Bansal in the role. Just earlier this month Bansal said he was only halfway through the job of reviving Boral.

The other path for minority shareholders is to hold out and go it alone, betting there is further share upside to come for Boral — although the building materials play is unlikely to resume dividends for some time. This argument will be keenly felt by the dividend-hungry retail shareholders that are estimated to make up at least half of the Boral minorities.

Boral has yet to formally name who will run the process inside the boardroom, although the task is likely to go to lead independent director Rob Sindel, the former CSR boss.

Apart from Seven Group, Macquarie Group is the only other significant player, with 6.7 per cent although this is understood to be part of an equity swap arrangement with Seven. Barrenjoey and Macquarie are advising Seven and both stand to generate up to $3.5m in fees if the bid is a success.

For Stokes the buyout represents the continued evolution of Seven Group, the investment company backed by his multi-billionaire father Kerry.

Just a decade ago, Seven Group was largely a holding vehicle for WestTrac and the television network Seven West Media and some property and tech bets. Then, the headstock Seven Group had an enterprise value of $4.5bn.

Today, it is worth $18.5bn with a much clearer purpose with its businesses built around mining production, infrastructure and energy via exposure to Cooper Basin producer Beach.

It is notable how intense disruption in media has slammed free-to-air television the most, dramatically shrinking Seven West Media from billions of dollars to a market value of less than $400m.

The broader strategy shift means Seven has sidestepped the brunt of media losses and built a business designed to grow as Australia grows. And one way or another, Stokes is determined for Boral to play a part of this.

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