Sunday, January 23, 2011

Fletcher Building: Crane Takeover Offer Well Timed

The takeover offer by Fletcher Building Ltd [FBU.NZX] for Crane Group Ltd [CRG.ASX] comes at an opportune time for Fletcher. Crane Group is at or near the bottom of a business cycle over the last 6 years (see 6 year summary from the CRG 2010 Annual Report below) and the share price has been trading at a multi year low so Fletcher has made a bid that would have otherwise been higher near the top of the business cycle.

Click on picture to enlarge view

Crane has had a patchy last 10 years with profit ranging from a AU$15 million loss in 2004 at its lowest and a $AU60 million profit in 2008 at the high end. Revenue has ranged from $1.4 billion in 2000 to $2.3 billion in 2008.

2010 half year profit of $21 million was up 16.8% on 2009 and a research report from Aspect Huntly indicates positive earnings with "upside to come" from the commercial building sector - the major floods in Australia over the last month will be a big benefit to Crane and to Fletcher Building so this upside is likely to be significant.

This is where FBU have a problem because CRG management have indicated that the offer for Crane is far too low and significantly undervalues the company and its long term prospects.

Fletcher do not have a good history with acquisitions providing good value for shareholders, with the purchase of Formica Corp a few years ago, for almost a billion dollars, destroying shareholder value and adding less than nothing to the balance sheet. If the offer for Crane is successful it could provide some benefit to FBU shareholders if they can take over the company at its current price.

The AU$ 740 million bid for 90% of the company is detailed as follows and can be found in more detail here.

  • Australasian building materials manufacturing and distribution company Fletcher Building (FB) has bid for CRG offering $3.43 cash and 1 FB share implying a value of $9.35, a 28% premium to CRG’s one month volume weighted average price equating to an FY11 PE multiple of 19 based on consensus forecasts and an EV/EBIT multiple of 11.8.

  • FB already owns 14.9% of CRG, 13.1% of which it bought from institutional shareholders for $9.35 cash immediately prior to announcement of the bid.

  • The bid includes a 90% minimum acceptance condition.

For FBU shareholders like myself this is a nervous time. If the proposed acquisition doesn't come off there will be millions of dollars of cost associated with the takeover activity.

Analysts have indicated that as Crane has over 80% of institutional investors on its shareholder registry so a takeover is likely to be an easier case to make than with a company with more mum and dad investors as shareholders.

We can only cross our fingers that FBU are able to grab Crane at their current bid price and add value to both companies if successful.

Fletcher Building @ Share Investor

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c Share Investor 2011

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