toll may beat cost target

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Toll May Beat Cost Target, Expects A$1.2 Bln for Rail (Update1)

July 9 (Bloomberg) -- Toll Holdings Ltd., Australia's biggest freight company, said it will probably reach its target of cost savings from its acquisition of Patrick Corp. ahead of schedule and that total savings may be higher than envisaged.

Toll, based in Melbourne, expects to reach its target of between A$60 million ($45 million) and A$65 million of savings in a shorter time than the stated three years, Chief Executive Officer Paul Little told Australian Broadcasting Corp.'s Inside Business program today.

Little, 58, in May won a nine-month, A$6.2 billion ($4.7 billion) takeover battle for Patrick, giving him control of the movement of goods across Australia from shipment to final delivery. He promised to deliver savings of A$60 million to A$65 million within three years by cutting staff and combining the administration of Patrick and Toll.

``We were certainly expecting the cost synergies that they were able to generate to be higher than their initial estimates,'' said Atul Lele, who helps manage the equivalent of $254 million at White Funds Management in Sydney, including Toll shares. ``It's certainly a positive. Going forward we're really looking for some revenue uplift from the deal as well.''

Shares of Toll on July 7 fell 1 cent, or 0.1 percent, to A$14.65 on the Australian Stock Exchange. They have declined 1.7 percent this year, compared with a 7.8 percent gain in the benchmark S&P/ASX 200 Index.

Pacific National Sale

``We will get to the A$60-A$65'' million, Little said. ``That will all come from cost savings now. Originally we had some revenue synergies built into that so I think we will exceed the 65 and we'll probably get there quicker than the three years we'd originally set ourselves.''

Little said he expects to get about A$1.2 billion for the 50 percent stake in Pacific National that the company is under regulatory orders to sell. Buying interest in the rail venture stake is ``significant'' and has come from industrial, financial and infrastructure companies, he said. Toll isn't considering a public share sale of the unit, he said.

``I think the correct deal at the end of the day will see a mix of wanting a partner that complements their involvement in the board and in the company as the shareholder, and obviously gives us the right price,'' Little said.

`Prized Asset'

Toll in March agreed to sell A$1.5 billion of assets, including 50 percent of Pacific National, to win approval for the Patrick acquisition from Australia's national competition regulator. Toll had originally planned to take full ownership of Pacific National, which it ran in partnership with Sydney-based Patrick.

``It's certainly a prized asset,'' said Lele, who believes the stake may fetch more than A$1.2 billion. ``If you look at recent deals that have been done in that space, certainly transport infrastructure has been able to garner fairly significant prices, even in the last month if you look at the ports deals that have gone through.''

Goldman Sachs Group Inc. last month agreed to pay 2.8 billion pounds ($5.2 billion) for Associated British Ports Holdings Plc, 31 percent more than the U.K.'s biggest port owner was valued at before a takeover battle began March 27.

Toll's half-share in Pacific National is valued at as much as A$1.4 billion by Paul Ryan, an analyst at Goldman Sachs JBWere Pty., in a report released June 2.

Virgin Blue

Toll is also selling Patrick's Bass Strait shipping and freight-forwarding business, a vehicle transport business and Prix Car, an auto handler.

Toll will probably decide by the end of the year whether it will retain the 62 percent stake in Virgin Blue Holdings Ltd. that it acquired through Patrick, Little said. Virgin Blue, Australia's second-largest airline, is run in a venture with the Virgin Group.

``We want to maximize Toll's investment in the Virgin Blue business,'' Little said. ``We've now had our first board meeting, second one next week. I'm very impressed with what I've seen so far, I think it's a very good model.''

Virgin Blue Chief Executive Officer Brett Godfrey and his management team will discuss the company's ``larger strategic issues'' with Toll at the next board meeting, Little said.

``Insofar as our long-term interest in that asset we haven't made that decision yet, but my view is that it will be made before the end of this calendar year,'' he said. ``It is very much an issue built around what is in the best interests of our shareholders.''

Toll's ``wait-and-see'' approach towards its Virgin Blue stake is ``quite prudent,'' given an expected increase in returns from the airline due to increasing yields, passenger numbers and capacity expansions once oil prices moderate, Lele said.

``I think there is a place for Virgin in Toll's business,'' Lele said. ``We see it as an excellent business in a pretty bad industry'' affected by fuel costs and labor market restrictions, he said.