Fletcher Building Ltd dropped its on-the-quiet attempt to buy fellow NZX-listed company Steel & Tube Holdings Ltd yesterday, 3 hours after Steel & Tube told the exchange a revised offer still undervalued it.
Remarkably, Fletcher blamed the Steel & Tube board’s lack of support to “progress the proposal in a timely manner”.
5 weeks after Fletcher’s initial confidential approach, the Steel & Tube board decided it needed expert advice on Friday’s revised offer that would take 3-4 weeks to confirm.
Fletcher said they’d had “ample time”.
Again, as it did with its initial offer, Fletcher focused on the short-term timeframe of Steel & Tube’s share price, ignoring the turnaround process Steel & Tube has begun after a $38 million annual loss.
Fletcher initially began talks confidentially with the Steel & Tube board, and also with major shareholders in the target company, on its 10 September proposal to make a non-binding indicative offer of $1.70/share for the whole of Steel & Tube.
12 days after Steel & Tube disclosed that offer & its rejection to the market, Fletcher came again with a $1.90/share price tag plus a 5c/share dividend, with imputation credits.
This time, Steel & Tube told the market:
- Its advisors’ (First NZ Capital Ltd) view on Steel & Tube’s intrinsic value was between $1.95-2.36/share, excluding the company’s share of synergies, and
- The permitted dividend doesn’t adequately compensate shareholders for the extended timeframe realistically required to seek regulatory approvals.
The Steel & Tube board said of the new offer:
“The revised offer of $1.90/share implies an enterprise value (EV) of $341 million and is only an 8.5x multiple of our long-term sustainable earnings, assessed as 2021 financial year ebit (earnings before interest & tax) of $40 million. Comparatively, excluding the company’s share of synergies, our advisors’ valuation range is an implied EV of $346-414 million.
“However, Steel & Tube advises that in light of the revised offer the board is commissioning an independent expert report which will take 3-4 weeks, and will further consult its legal & financial advisors about the implications of the revised offer. Fletcher Building has been advised of this.”
Steel & Tube chair Susan Paterson said: “The revised non-binding indicative offer from Fletchers does not prevent higher value approaches from other interested parties. The board will continue to evaluate strategies & actions that deliver the best value to shareholders and is continuing to focus on executing our turn-around strategy.”
In her letter to Fletcher chair Bruce Hassall & chief executive Ross Taylor, Ms Paterson said: “While we understand you may have indications of some support from a couple of our institutional shareholders, the board needs to consider the interests of all shareholders taken as a whole, and the execution risks inherent in the revised non-binding indicative offer.
“Chapman Tripp continues to advise that the proposed acquisition would face challenging issues for clearance under the Commerce Act, due to Fletcher’s vertical presence & significant size in several steel product markets.”
Fletcher said in its withdrawal announcement it had pulled its offer “due to lack of support from Steel & Tube’s board to progress the proposal in a timely manner.
“Steel & Tube has announced that it does not support Fletcher Building’s revised proposal, and that it would need a further 3-4 weeks to confirm this view. Fletcher Building has been engaging with Steel & Tube on a proposal for 5 weeks now, which has provided ample time for the board to seek independent valuation advice.
“During that period, Fletcher Building received support for progressing its proposal from major Steel & Tube shareholders Milford Asset Management & Harbour Asset Management.”
Analysing share price movements with a glass eye
Fletcher said its revised proposal “provided a significant premium of more than 50% to Steel & Tube’s pre-announcement 5-day volume-weighted average price”.
Fletcher chief executive Ross Taylor said: “Despite offering what we believe was a very attractive offer to Steel & Tube shareholders, our engagement with the Steel & Tube board has been unsuccessful and, as a result, we have withdrawn the acquisition proposal.
“Based on expert advice, Fletcher Building remains confident the transaction would have received Commerce Commission clearance. Steel & Tube’s market share information released on 10 October doesn’t properly take into account the material impact of direct imported products in relevant markets.”
Steel & Tube Holdings Ltd’s share price rose 11c to $1.34 in the 4 days before it revealed Fletcher Building Ltd’s intention to take it over. On 3 October, the day of the announcement, the price rose another 22c, and 3c more the next day to reach $1.59 – a 36% gain in a week.
The price had fallen to $1.15 at the end of August, tumbling from $1.83 in May & $2.06 in January.
Steel & Tube’s share price dropped to $1.48 a week ago and has since been in a 3c band around that price.
Fletcher’s share price hit a short-term peak of $6.58 on 2 October, the day before Steel & Tube revealed the confidential offer. Since then, the Fletcher price has tumbled to $6.10.
Like Steel & Tube, the Fletcher share price has been hit over the last 2 years by revelations of incompetent management & board control.
On 2 February, 12 days before Fletcher announced an extra $486 million of losses by its Building + Interiors division, accompanied by chair Sir Ralph Norris’s decision to resign, its share price hit a 4-month high of $7.61. It bottomed on 4 April at $5.53 and made it back up to $7.13 on 30 July.
The Fletcher share price had been at $10.19 in November 2016. The company had become aware of deep problems within its vertical construction business over that summer, and the price had dropped to $8.73 by 17 March 2017, the Friday before now-departed chief executive Mark Adamson made the first revelation of the extent of Fletcher’s problems.
5 October 2018: The price was moving, the confidentiality remains, and still-weak Fletcher insinuates Steel & Tube takeover “compelling”
13 September 2018: Steel & Tube bookbuild scaled
30 August 2018: Steel & Tube completes books-clearing, future already brighter
22 August 2018: Updated: A loss, but flow of red ink stops at Fletcher Building
7 August 2018: Updated: Steel & Tube seeks $80.9 million from placement & rights issue, updates guidance
1 July 2018: Fletcher Building exits Sims recycling joint venture
22 June 2018: Australia the next big focus for Fletcher, offsite construction an innovation example
23 May 2018: Review puts Steel & Tube ebit loss at $38 million
14 February 2018: Another $486 million of losses for Fletcher Building, and Norris resigns
Attribution: Fletcher and Steel & Tube releases, websites, NZX.