patrick gains from toll

Patrick gains from Toll
From: By Terry McCrann
April 19, 2006

A LONG, long time ago, in a galaxy far, far away, Paul Little launched his multi-billion dollar bid for Patrick Corporation and global glory.

He went public with his intentions just under six months ago. And a "done deal" – sort-of, as somebody still would have had to "tell" competition czar Graeme Samuel – could probably have been sealed at least six months before that.

In the hyper-state of our share market, the "long-term" has a half-life of a few months – so it all "started" at least two half-lives back into the very distant past.

The bid was also launched into a very different investment "galaxy" than the one we now inhabit.

Specifically, one where the main stock exchange index, the S&P 200, was at 4460; and the magic 5000 looked an ambitious ask.

Yesterday the index sat at 5248, some 17.6 per cent above that August level.

It provides an interesting measure of who might have got most out of this merger, made in an old trucker's heaven.

Picking a starting reference point for the prices of Toll (tol.ASX:Quote,News) and its target Patrick (prk.ASX:Quote,News) is somewhat difficult, because of the intense speculation that preceded the Toll announcement.

That came on a Monday and sent both Patrick and Toll's share prices rocketing. Patrick prk.ASX:Quote,News) was up 93c to $7.38 and Toll $1.09 to $14.67. It was immediately seen as a win-win.

However, on the previous Friday, when speculation was running – very accurately – wild, Toll's share price had been relatively stable, adding only a few cents, while Patrick, as the forecast target, had gone up 75c.

The other complicating factor was that Patrick's share price had been under pressure after its partial takeover of Virgin Blue (vba.ASX:Quote,News). So it had an inherent "bounce-back" factor built in to a takeover announcement.

Compare where they've ended up. Toll peaked at $14.78 yesterday and closed at $14.33. Patrick finished at $8.61 – a slight discount to the $8.73 "see-through" value of the Toll offer.

So from the day of the actual offer announcement, Toll (tol.ASX:Quote,News) is actually down 34c, or just over 2 per cent. Patrick, in contrast, is up a thumping 17 per cent.

Thank you very much, Mr Corrigan and Peter Scanlon. Or should that be, thank you very much Corrigan, Scanlon and Little.

Has the CEO of Toll created about $750 million of wealth, and transferred $860 million – or more than was created – to Patrick shareholders?

And that's not even accounting for the special dividend Corrigan and Scanlon paid out to shareholders, including themselves, courtesy of a special dividend from their partly-owned but fully-controlled Virgin Blue.

And worse, much worse, that Little has achieved this in a market that was generally up 17 per cent. So he helped Patrick shareholders tread water, so to speak. While his own went backwards by that market comparison.

Not so fast. For two reasons. One looking back into that past, the other into the future.

Arguably, the starting point for this sort of assessment should be before the market speculation ran wild.

The Toll price on the day of the announcement arguably incorporated upfront all the benefits of the merger; and over the next eight months Little would have to give up some to Samuel and some to Patrick shareholders.

A better measure of the merger benefit – critically, only to this point – would take a slightly earlier starting point. When the Toll price was about $13.50.

This at least gives you a 6 per cent increase subsequently. It's positive but sub-market – albeit market driven by very un-Toll like companies such as BHP Billiton and Rio Tinto.

But then the comparison for Patrick looks even better – or worse, depending on where you are looking from. Patrick is up 51 per cent from its pre-speculation level.

The conclusion is unambiguous. Shareholders in the target rather than the acquirer are the major beneficiaries.

From go to whoa, some $2.5 billion of sharemarket value has been created. Of that, $2.2 billion or so has flowed to Patrick shareholders; less than $300 million to Toll.