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 Wednesday, the day of the announcement, the price rose another 22c, and 3c more yesterday 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.
Both companies have been in serious trouble in the last 2 years, Fletcher Building in its construction division, and especially big-project vertical construction, Steel & Tube turning into a very poorly performing supplier, forecasting a heavy loss in May but clearing its books in August.
Fletcher Building priced its offer at $1.70, a cheeky undervaluation for an entity heading north under its own steam, although Fletcher chief executive Ross Taylor said that – somehow, by being bought out of an enterprise at the start of its journey on a stronger future – the offer was compelling and had the ability to deliver significant value to Steel & Tube shareholders.
That, to me, is arrant nonsense, which is not to say that a large number of Steel & Tube shareholders won’t take today’s money rather than wait for the company to grow on its own account.
Non-binding and Fletcher still wants confidentiality
Fletcher Building proposed acquiring all of Steel & Tube’s shares through a scheme of arrangement. The offer, which Fletcher delivered on 10 September, was non-binding, indicative & confidential. Steel & Tube responded publicly on Wednesday after seeking legal & commercial advice, saying it didn’t support the offer.
Steel & Tube chair Susan Paterson commented: “The fact that Fletchers has made this indicative offer speaks to our reputation & the strength of our business. Obviously Fletchers sees a lot of value in our business & its future potential as the benefits of our turn-around strategy start to become clear… as do we.”
She said $1.70 “significantly undervalues” Steel & Tube, then turned to practicalities if Fletcher pursued its approach: “The proposed acquisition would need clearance under the Commerce Act, which would take some time to work through due to Fletcher’s vertical presence & significant size in several steel product markets.”
She added: “While the market remains highly competitive, Steel & Tube continues to win new customers, sign large contracts, increase efficiencies & reduce costs.”
Fletcher focuses on short-term comparisons
Fletcher Building concentrated on the short-term comparisons, which showed 35-38% premiums over most recent trading.
Looking further back, Fletcher Building said: “A price of $1.70/share implies a transaction multiple of 12.3x Steel & Tube’s ebit (earnings before interest & tax) guidance for the 2019 financial year. Fletcher Building believes this implied transaction multiple represents compelling value for Steel & Tube shareholders given it is materially above the average trading EV/EBIT multiple over the last 5 years of 9.2x.”
Offer process will continue
Fletcher Building chief executive Ross Taylor, who took charge of the company last November, said Fletcher Building preferred to work constructively with Steel & Tube’s board to progress its proposal, and had been in discussions with Steel & Tube & a number of its major shareholders over the last 3 weeks.
“Through this process shareholders, who collectively own more than 20% of all Steel & Tube shares on issue, confirmed their position that the board of Steel & Tube should, in good faith, progress the development of the proposal with Fletcher Building, with a view to it being put to Steel & Tube shareholders.
“Given the strong shareholder support to date, Fletcher Building intends to continue discussions with Steel & Tube shareholders & board, with a view to reaching an acceptable outcome in the immediate future.”
He said the acquisition “is consistent with Fletcher Building’s 5-year strategy announced in June, and fits firmly within its focus on the New Zealand & Australian building products & distribution sectors.
“An acquisition of Steel & Tube is a unique opportunity to create the leading steel distribution business in the New Zealand market. We believe that there is a significant ability to leverage our business model & people across the combined business for the benefit of our customers, employees & shareholders.
“In particular, we believe customers would benefit from an improved service offering & distribution network, broader product range and investment in innovation. We consider there to be potential value creation over time as benefits of the combined operation are realised, providing us with the confidence to present an attractive proposal to Steel & Tube.”
“We believe this is a compelling proposal for Steel & Tube shareholders, representing a significant premium to recent share price trading and broker valuations. If successful, the proposed transaction has the ability to deliver significant value to Steel & Tube shareholders and materially de-risk the turnaround plan that Steel & Tube management are beginning to embark on,” says Mr Taylor.
The proposed transaction would require clearance from the Commerce Commission. Fletcher Building has undertaken a significant amount of work with its economic and legal advisers on combining Fletcher Steel and Steel & Tube.
Fletcher raises nationalism & ‘still competition’ flags
In an argument likely to be needed to convince the Commerce Commission, Mr Taylor said: “Fletcher Building believes that the New Zealand steel industry would remain highly competitive if it acquired Steel & Tube, with a number of well established competitors remaining, in addition to a growing number of offshore suppliers selling directly into the market.
“This work has given Fletcher Building confidence that the transaction would receive the necessary clearance from the Commerce Commission. Approval from the Overseas Investment Office will also be necessary.”
Mr Taylor said – without acknowledging the sharp lift in share price 4 days before Steel & Tube revealed the approach – “discussions with Steel & Tube in relation to the proposal are intended to be progressed confidentially until an agreement can be reached. Until that point, the proposal remains incomplete & is non-binding, and therefore may not result in a transaction occurring. The proposal is not a takeover notice for the purposes of the Takeovers Code. The company will update the market with any material developments as appropriate.”
Earlier Fletcher stories:
22 August 2018: Updated: A loss, but flow of red ink stops at Fletcher Building
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
14 February 2018: Another $486 million of losses for Fletcher Building, and Norris resigns
21 September 2017: A year on, Fletcher board still has ‘construction nous vacancy’ pencilled in
21 July 2017: Fletcher Building takes axe again to construction earnings, Adamson ousted
20 March 2017: Fletcher Building cuts earnings guidance by $110 million
Earlier Steel & Tube stories:
24 January 2018: Steel & Tube reaffirms guidance based on long list of new positives
13 September 2018: Steel & Tube bookbuild scaled
30 August 2018: Steel & Tube completes books-clearing, future already brighter
7 August 2018: Updated: Steel & Tube seeks $80.9 million from placement & rights issue, updates guidance
23 May 2018: Review puts Steel & Tube ebit loss at $38 million
21 August 2017: Steel & Tube performance dissatisfies new chair
Attribution: Fletcher and Steel & Tube releases.