Stokes takes Boral to task for selling US business at a loss

Billionaire Kerry Stokes’ Seven Group Holdings has taken takeover target Boral to task for selling its US building products business at a loss, saying the company’s management should have secured a better price for the asset.

Seven Group is the largest shareholder of ASX-listed Boral, which on Monday said it has signed a deal with to sell its North American business for $US2.15 billion ($2.9 billion). Boral is also fending off a $8 billion offer from Seven Group as the conglomerate looks to lift its stake in the company from 24 per cent to 30 per cent.

Boral has announced the sale of its North American building products business for $2.9 billion.Credit: Louie Douvis

Seven Group was scathing in its assessment of the US deal on Monday, saying that Boral’s management had failed to capture the full value of its US business through the sale.

“The US Building Products business has been sold for a loss,” a Seven Group spokesman said.

“This business has been outperforming while the Australian business is under-performing. This seems like a rushed sale process in response to our offer, our view is that Boral should have secured more.”

The sale of Boral’s building products business to US group Westlake is above the $US1.8 billion to $US2 billion valuation range ascribed to the business by Independent Expert Grant Samuel & Associates, which valued the entire Boral business at up to $11.2 billion in a defence statement released earlier this month.

Boral’s management has used the valuation to reject Seven Group’s offer which values the company at $8 billion.

But the sale also underlines the losses suffered by investors. Boral acquired the North American business known as Headwaters in 2017 for $US2.6 billion as part of the expansion plans by its then-chief executive Mike Kane.

Seven Group has also expressed concern about the announcement that Boral’s chief executive, Zlatko Todorcevski, and chief financial officer, Tino La Spina, will keep their incentives under certain circumstances even if their employment is terminated.

“This reinforces our view that this is in response to Seven Group’s takeover. Shareholders should be concerned by this,” Seven Group said.

Boral hit back at Seven Group’s comments saying the sales process preceded Seven Group’s bid, lobbed in May this year, and was above the independent expert’s valuation.

The sales price also exceeds analyst estimates. In May, JP Morgan put a price tag of $US1.6 billion on Boral’s US business while MST Marquee valued it at $US1.8 billion the same month.

“This is a strong outcome for Boral shareholders,” the company said.

As for the executive incentives, Boral said its management remains “fully accountable for completing the key initiatives that are underway during what is a critical transformation period for the company.”

Ratings agency Moody’s said the US business is expected to perform strongly amid a US boom.

“The US building product business has faced many challenges but we expect this segment to benefit from the likely upward momentum of the US housing market over the next 12-18 months,” said Saranga Ranasinghe, vice president of Moody’s Investors Service.

“We believe that an on-market buy-back is the most effective method of returning this surplus capital to our shareholders,” Mr Todorcevski said.Credit: Dominic Lorrimer

Mr Todorcevski said Boral’s board would assess the use of the surplus capital generated by the deal.

“After optimising Boral’s net debt position and allowing for reinvestment needs, we expect a significant surplus to be available for distribution to Boral’s shareholders,” he said.

“The board will determine the most appropriate way to return surplus capital to shareholders taking into account the availability of franking credits, the relative share price and the preferences of Boral shareholders as a whole.”

Seven Group has extended its takeover offer to June 30.

Seven Group could lift its stake to 25 per cent without acquiring a single share with Boral conducting a share market buyback at up to $6.94 each. Boral reported it had acquired 43.1 million shares as of June 8 and could buy back up to 122 million shares this year which is equal to 10 per cent of its issued shares.

Mr Todorcevski defended the scale of the buyback when queried by analysts this month saying it is value accretive and earnings per share accretive for investors.

Jefferies Research said the buyback is on pace to expire within months and remove an apparent pillar of support for the share price which traded above $7 for the first time since 2018 on Monday morning, compared to a $6.50 offer price from Seven Group.

“The on-market buyback accounts for 23 per cent of daily traded volume since inception,” said Jefferies Research.

The profit on sale of the US business is expected to be disclosed as part of Boral’s full year FY2021 results on August 24, 2021 when it will also update the market on the potential sale of its North American fly ash business.

“Boral is continuing to explore value creation opportunities through a potential joint venture, strategic alliance, divestment to a third party or continued ownership of the fly ash business,” it said.

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