allocating proceeds - calculations

There is now a good opportunity for management to reward long-suffering and persevering shareholders who have backed and propped up this company over the years. It is the loyal shareholders who provided the funds in the recent equity issues and supported management in recent difficult and uncertain times. The directors should ensure members get a generous allocation of the proceeds from the sale. Only an adequate reward will restore shareholders confidence in the company and its management for the future and ensure ongoing co-operation.

The recent trade sale to Wilma, which is subject to final regulatory approvals, for $1.75 billion, will net about $1.6 billion, after capital gains tax and costs. Additionally, the company has sold an Asian business to Rockwell for $128 million. This leaves about $1.728 billion of proceeds to be allocated. The vast majority of these proceeds must be allocated to shareholders. If there are about 1.5 billion ordinary shares issued (as at 31/3/10), then there is potential for directors to distribute proceeds of up to $1.15 per share. One journalist indicates a distribution of around .80c is likely. I believe a payout of between .90c and $1.00 per share is appropriate. It will be up to management to determine how to structure the distribution - whether it be as a return of capital, a special dividend or a combination of both.


It would be extremely unwise for management to use the proceeds to embark on acquisitions in present market conditions just because they will be flush with funds from the sale of the businesses. The company has a leading portfolio of building product brands and an effective 1/3 interest in an aluminium smelter which produce strong recurring cash flows. It is important management continues to focus on strengthening existing core building products operations (eg. glass, plasterboard etc) to maintain this strong cash-flow generating capability. Small strategic bolt-on acquisitions might be considered down the track if opportunities present and market conditions improve.

By paying down debt and reducing gearing ratios to prudent levels should satisfy the interested stakeholders in asbestos liabilities. The company reported its gearing ratio as 29.7% at 31/3/10, which was down from 43.3% in the previous year. At the gearing ratio of 29.7%, the disclosed net debt was $767 million. It would not be unreasonable for the company to allocate some proceeds to reduce its net debt further to give a gearing ratio of about 20 to 25%. A deleveraging of the balance sheet should be viewed positively to meet future asbestos obligations.

After considering all these factors, I believe management should use the $1.728 billion of net sale proceeds as follows:-

1. Pay an adequate return of capital and/or special dividend to shareholders of say $0.90c per ordinary share. (ie $0.90c per share x 1.5 billion shares
= $1.35 billion)

2. Reduce company debt further by $250 million to ensure a safer gearing level on the balance sheet to help ensure asbestos liabilities are met (= $.25 billion)

3. Any small surplus (say, $128 million) is reinvested into the existing operation to sustain superior cash flow generating ability and/or to to be held in a reserve for any small bolt-on acquisitions in the future (= $.128 billion)