Platinum Equity Crunching the Numbers

For the benefit of those who missed Thursday's article in the Australian (partly shared by Kaindia & Antman4) - the following article was what caused Thursday's bump in the share price. While the retrace yesterday was unfortunate (but understandable given market weakness) - I don't believe for one moment they have gone away, or indeed there aren't others quietly doing some numbers in the background.

Number of positive SP catalysts potentially on the way, including (a) the Tradelink sale is underway (which will help reduce debt a bit), (b) appointment of new well-respected execs (to replace the disgraced old guard), (c) an indicative T/O offer could get lobbed at anytime, to try gain access to the books & firm up a binding bid (would need to be a good one to entertain at these SP levels).

Obviously the SP is being discounted heavily at the moment to account for (a) uncertainty about the outcome of WA Iplex pipes issue, (b) Fletcher management's very ordinary track record in squandering shareholder wealth with poorly priced & risk-managed contracts etc, and (c) the company's high debt levels causing a material discount for the perceived risk of a cap raising to reduce debt [which major shareholders are understandably not keen on, so this will only happen as a last resort if required].

Personally I believe the discount for the above is overly-conservative, and the majority of the businesses and assets in the Fletcher stable are of sufficient quality and scale as to be not only valuable and well-known, but very difficult to replicate (i.e. enter cashed-up purchaser, to cover the SP discount as their bid premium, and hoover up the assets at or below their inherent value - effectively a takeover with an effective nil premium paid for control). While I can understand shareholder's hesitancy to trust or believe in the company after so many waste & wasted opportunities by the old guard - I really do think the market is mispricing this one badly (and there lies the opportunity for those willing to take a risk-weighted position).

Platinum runs ruler over Fletcher Building, taps Gresham: DataRoom | The Australian
Platinum runs ruler over Fletcher Building, taps Gresham

By BRIDGET CARTER

DATAROOM EDITOR

US-based Platinum Equity is understood to be carrying out a substantial amount of work on a buyout of all or parts of Fletcher Building as the Australian- and New Zealand-listed stock remains under pressure.

Platinum specialises in undervalued and out-of-favour market opportunities, but has strong expertise in the building materials industry, one set to benefit from the Australasian housing shortage for the next two decades to come.

Platinum last year acquired the Australian and New Zealand building materials operations for Jeld-Wen for $688m.

The business is the designer, manufacturer and distributor of windows and doors, with product brands including Corinthian, Stegbar and Breezway. Allegro Funds was the under bidder in the contest and at the time.

Platinum Equity managing director Adam Cooper described the investment in Jeld-Wen at the time as “right in our wheelhouse”.

In the building products space, the firm’s current portfolio includes Cabinetworks, the largest independently owned manufacturer and distributor of kitchen and bath cabinets in the US, and PGS, a provider of hard surface floor coverings.

Previous building products investments include finish solutions provider Interior Logic Group, building materials distributor PrimeSource and building materials wholesale distributor Nilco.

Gresham is believed to be undertaking work on Fletcher Building on behalf of Platinum, with many of its assets, including Tradelink plumbing supplies, Iplex pipes and Laminex a good fit for its global portfolio.

The LA-based Platinum was founded in 1995 by Tom Gores and has about $US48bn of assets under management and a portfolio of about 50 operating companies.

A year ago Platinum was running the ruler over the Australian 7-Eleven business.

Platinum Equity purchased the Staples and OfficeMax businesses in Australia and New Zealand, which have combined to become Winc, and it previously owned Sensis, an Australian directories business the firm acquired from Telstra.

But, Fletcher Building — over time considered one of New Zealand’s blue chip stocks — is considered superior, and any offer would almost certainly be rejected at a time it has no management and board.

However, assets are likely to come up for sale once new management and directors are hired, with a criticism from shareholders being the group’s 28 different businesses are too many.

Core to the portfolio are believed to be Fletcher’s wall boards or plasterboard, insulation, concrete, cement and aggregates and building products distribution units, with all other units potentially sold down over time.

One possibility is Platinum lobs an offer for parts of the portfolio, in a similar way to BHP’s offer for Anglo American, where some assets would be handed back to shareholders.

The interest coincides with the sale process on foot for Fletcher’s $NZ150m Tradelink plumbing supplies business, with first round bids due shortly.

The need for Fletcher Building to get some money through the door is becoming increasingly pressing as its earnings prospects deteriorate in the short-term high interest rate environment, pushing its debt to metrics beyond its comfortable target range, outlined in its half-year result in February.

It has about $NZ2bn of debt with a market value of $2.1bn.

Fletcher Building is at its weakest point — it has lost its chief executive, chief financial officer, chairman and other directors after disappointing results for the six months to December with losses, profit downgrades and writedowns, which makes it vulnerable.

While the outlook for the Australia and New Zealand building materials market this year remains bleak, it is likely to improve in 2025.

This, at the same time, makes it the exact reason why it could be the perfect time for a suitor to strike, and the long-term fundamentals are strong with a shortage of housing.

Fletcher’s is known for brands including Pink Batts insulation, Golden Bay Cement, and Placemakers building products distribution in New Zealand, which competes with Bunnings.

But, the less attractive assets in its portfolio are some of the Australian businesses it acquired as part of its $740m Crane Group plumbing supplies acquisition in 2010.

Other brands in its stable are Laminex laminates products, Mico plumbing supplies, Stramit roofing and it distributes Formica products.

Also a property developer, it has a valuable $1bn-plus real estate portfolio in New Zealand.

Less than half of its revenue is from building products manufacturing and distribution in New Zealand.

Fletcher Building Australia generates about a third of its revenue.

Other suitors trying to capitalise on the weakness of Fletcher Building through a takeover bid could include opportunistic funds Oaktree Capital Management, Allegro Funds or US-based private equity firm Lone Star.

A buyout would mark yet another deal in the building materials space, following Seven Group’s purchase of Boral, Saint Gorbain’s purchase of CSR and CRH buying AdBri at a time when global players can see solid long-term value in the sector.

BRIDGET CARTER

DATAROOM EDITOR

Bridget Carter has worked as a writer and editor for The Australian’s DataRoom column since it was launched in 2013, focusing on capital markets, mergers and acquisitions, private equity and investment banking.