NZ Steel purchase heads off risk of consolidated customer, First NZ says

Thursday 18th October 2018

New Zealand Steel's $46 million stake in distributor Steel & Tube has shut down the creation of a potentially tricky customer flexing its muscles to get better pricing, analysts say.

The local unit of Australia's BlueScope Steel paid a 17 percent premium for almost 16 percent of Steel & Tube, effectively blocking any future takeover. The issue became live for NZ Steel when Fletcher Building made two offers for the steel products distributor. A tie-up between those companies would have created a domestic steel customer with about half the market.

First NZ Capital analysts said BlueScope needed to clamp down on the risk of a consolidated customer emerging and wrestling down prices. The New Zealand business is especially vulnerable given it doesn't have a viable export market if distributors chose to purchase imported products.

The research house doesn't anticipate BlueScope will pursue a full takeover having gone through a poor experience when it tried to consolidate steel distribution in Australia.

"Historically, Steel & Tube was a very solid business, but has seen declining revenues from a growing NZ market, despite debt-funded acquisitions," FNZC said. "With nurturing, the business should be able to generate a dividend yield to BlueScope, in addition to securing its route to market."

NZ Steel paid $1.75 a share, a small premium to Fletcher's opening gambit. Fletcher made a second bid at $1.90 and left scope to pay a 5 cent special dividend, but walked away when Steel & Tube didn't immediately bite. Steel & Tube stock hit a trough in August when the company raised money at a steeply discounted price of $1.15. The shares recently traded at $1.45, down 25 percent so far this year.

Milford Asset Management was the seller and had been a backer of Fletcher's proposal. However, Steel & Tube's board wanted greater convincing. FNZC, as its advisor, had put a valuation of $1.95-to-$2.36 a share on the company.

The steel products maker has been overhauling its business under the leadership of Mark Malpass after a review this year uncovered a number of legacy problems. The board now thinks it's on a more sustainable path and has said recent sales trends have given it confidence it can resume dividend payments in the 2019 financial year.

Shareholders will have a say on that direction at next week's annual meeting, where chair Susan Paterson is up for re-election. Milford's John Johnstone withdrew from seeking an appointment to the board.

(BusinessDesk)

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