Soul Pattinson and Brickworks reveal $14bn merger with new ASX company

After 56 years and many battles to defend its cross-shareholding from corporate raiders, Soul Pattinson and Brickworks have pulled the trigger on a mega merger.

Soul Patterson CEO Todd Barlow, left, and Brickworks CEO Mark Eleanor. Picture: Jane Dempster

Washington H. Soul Pattinson is advancing further down the path of becoming one of Australia’s largest private equity investors after it snared a deal to bring stablemate Brickworks under its control.

Soul Patts boss Todd Barlow promised to “liberate” Brickworks so it can act on new opportunities not available to it as a public company enmeshed in a legacy cross-shareholding.

Flush too with a fresh capital injection of $550m from fund managers that cemented the deal over the weekend, Mr Barlow is not satisfied being a passive equity investor in other ASX-listed companies.

The new $14bn Washington H Soul Pattinson will realise his and his board’s dream of doing more deals that have the appearance of a classic private equity investment.

“It (Brickworks) will sit inside our private equity portfolio and if you look at any of our previous presentations those businesses are growing very, very quickly, and that’s because we can help them to look at bolt-on acquisitions that are synergistic and helpful to the growth of the business,” Mr Barlow told The Australian on Monday.

His Brickworks merger proposal will end a historic cross-shareholding between it and Soul Patts that was first struck in 1969 and has faced countless attempts to break it up.

“We can also take long-term decisions, so we are not worried about short-term results and we can actually build a business for the future.

Brickworks will become fully integrated into an enlarged, new Soul Patts. Picture: iStock

“And if you are a publicly traded company and you want to do an acquisition, you’ve got to somehow marry up the acquisition with your funding sources, and that is sometimes difficult to achieve. Whereas in our case, we have so much liquidity across the group we can just write a cheque.”

The consolidation of the two groups – if both sets of shareholders agree – will create a new building materials and industrial property division inside Soul Patts to sit alongside its existing stable of private equity, private credit investments and large stakes in other listed companies such as miner New Hope, telco Tuas and investor Pengana.

Its rapidly growing portfolio of private equity investments include a swim school, mining and agriculture.

Stunning the market – and the corporate raiders, fund managers, and investment bankers who had tried for the last 25 years in vain to break up the cross-shareholding – Soul Patts and Brickworks unveiled a $14bn deal to bring down the curtain on a cross-shareholding that has existed for 56 years.

Set in place as a defence decades ago against a future takeover that would likely be frowned upon by corporate regulators and the courts today, the diversified investor Soul Patts has a 43 per cent stake in Brickworks. Brickworks, the nation’s largest brickmaker as well as holding significant industrial property in a joint venture with Goodman Group, has a 26 per cent stake in Soul Patts.

The unwinding won immediate support from the market as many institutional investors rushed both companies to get their desired weighting in the stocks before Brickworks is absorbed into Soul Patts and the newly enlarged company is ranked 44th on the ASX 200 and, importantly, with substantially more free float for fund managers and a ‘must’ for index huggers.

Billionaire investor Robert Millner’s family will be the biggest shareholders in the merged group. Picture: Adam Yip

Shares in Brickworks, advised by Citi on the deal, rallied 27.6 per cent to $35.10 while Soul Patts rose 16.4 per cent to $43 on Monday. If approved by both shareholders it will turn Soul Patts into a player with $3.9bn in strategic investments, led by its stake in Brickworks, $2.4bn of property including industrial property and land, $2.2bn in listed equities comprising ASX 200 stocks, $2.2bn of private equity investments and $1.2bn in private credit investments such as corporate loans, bonds and structured credit investments.

In a complex corporate manoeuvre that is also designed to minimise any tax stings for investors in both companies, the duo unveiled on Monday a binding combination deed to create a newly capitalised ASX-listed group with the working name of TopCo.

Under the deal, Brickworks shareholders will receive an implied value of $30.28 per Brickworks share, representing a premium of 10.1 per cent to its Friday closing share price. The proposed merger is unanimously recommended by the Soul Patts board of directors and the independent directors of Brickworks.

Being a complicated scrip deal, TopCo will acquire all of the shares in Soul Patts and Brickworks. In consideration for TopCo, later to be renamed Washington H. Soul Pattinson and Company Limited, consideration issued to current Soul Patts and Brickworks investors will be:

• 1 TopCo share for every 1 Soul Patts share held at the record date; and

• 0.82 TopCo shares for every 1 Brickworks.

In a frenetic weekend of activity, Angus Aitken at his Aitken Mount Capital Partners raised $550m from investors to capitalise the new company. It is believed the raising initially started at $300m and quickly raced to $550m as institutions showed a huge appetite for Soul Patts stock and to see the deal done.

Such was the strength of the raising it was offered at a nil discount to Soul Patts’ share price with Perpetual (which in 2017 went to court to break up the cross-shareholding) taking up a large portion followed by Coopers Investors and Ausbil.

“We invited a small number of investors and when they heard the deal they wanted to invest money,” Mr Aitken told The Australian.

Based on the merger ratio and newly created TopCo shares, Soul Patts shareholders, Brickworks shareholders and new shareholders will own approximately 72 per cent, 19 per cent and 9 per cent of TopCo respectively.

“This deal is a cracking deal for both sets of shareholders and with the cross-shareholdings disappearing the free float goes up enormously and we see over $4.2bn of free float market cap being added at the current stock prices let alone as the stock re rates as we think it will,” Mr Aitken said.

If the deal is approved, Soul Patts and Brickworks chair Rob Millner will remain as chair of the enlarged Soul Patts and his family will control 7 to 8 per cent of the combined group to be its largest shareholder.