Fletcher to continue Steel & Tube pursuit

Wednesday 3rd October 2018

Fletcher Building is coy on whether it will raise its $284 million bid for Steel & Tube Holdings, saying shareholders holding more than 20 percent of the fabricator and distributor want the offer formally on the table.

Steel & Tube shares shot up 21 percent after the board knocked back the non-binding, indicative and confidential offer from Fletcher Building, stating it "significantly undervalues" the company. They last traded at $1.56, up 16 percent, though still below the $1.70 put forward by the country's biggest construction company.

Fletcher Building chief executive Ross Taylor told BusinessDesk he wants to see the process through.

"With the premium we are offering and that strong shareholder support, we remain keen and focused on continuing those discussions with the Steel & Tube board and getting an outcome."

He declined to comment on Fletcher's next move if there is no breakthrough in talks.

"We are not talking about strategy and tactics. We have laid out what we want to do. We want to approach this as a scheme with Steel & Tube. We want to agree that with them - that is our planned approach," he said.

In a scheme of arrangement a potential buyer works with the board of the target company through a period of due diligence. It then needs 75 percent approval from shareholders, with more than half the votes cast. That differs from a formal takeover, which needs to cross the 90 percent threshold before the bidder can mop up hold-out investors if they want full ownership.

Fletcher Building said it would prefer to "work constructively" with Steel & Tube's board. It noted it's been in confidential discussions with directors and a number of major shareholders for the past three weeks.

Shareholders who collectively own more than 20 percent of Steel & Tube stock think the board should "progress the development of the proposal" with a view to putting it to Steel & Tube shareholders," Fletcher said.

"The shareholders we have talked to are quite keen to see it progressed," Taylor said.

Fletcher said the $1.70 price implies a transaction multiple of 12.3 times Steel & Tube's earnings before interest and taxation guidance for the current financial year and "represents compelling value." Taylor said the price also represents a 35 percent to 38 percent premium on recent trading ranges.

The stock had tumbled 31 percent since the start of the year after impairment charges and restructuring costs forced it to raise money at a discount to keep its lenders onside.

Last month Steel & Tube reiterated its expectation that full-year ebit will climb to $25 million this year, up from $16.5 million before one-time costs in the year ended June 30. Ebit is then expected to climb to at least $35 million within three years.

Taylor said the merger and acquisition activity is consistent with Fletcher Building’s five-year strategy announced in June and within its focus on the New Zealand and Australian building products and distribution sectors.

"A core part of our overall strategy is to grow the New Zealand business," he said. Combining Fletcher's steel distribution business in New Zealand with Steel & Tube "is quite compelling."

He said the purchase would give the company a full product range and a better footprint across New Zealand. It would also give "a bit more scale that allows us to better invest in innovation and some of the digitisation and automation you need in these businesses."

Fletcher Building played down Steel & Tube's claims that the need for Commerce Commission clearance is a potential obstacle. It said it's undertaken a significant amount of work with its economic and legal advisors on combining the businesses.

"There is not much point starting this frivolously. We are quite confident it will remain competitive," said Taylor, adding there would still be a number of well-established competitors remaining, as well as a growing number of offshore suppliers selling directly into the market.

Approval from the Overseas Investment Office will also be necessary.

Fletcher Building's shares recently traded down 1.4 percent at $6.49.

(BusinessDesk)

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