Why I now see the JV as a near certainty

I’ve owned FBR 7 years. A month ago I decided I was maxed out & wouldn’t be buying any more. I topped up again yesterday.

Yesterday, I realised I’d been seeing the probability of this JV all wrong. Since then, instead of seeing it as a 50/50 chance & unknowable, I’m seeing it as a near certainty.

Perhaps this is obvious to everyone else & I’m just a bit slow on the uptake. But I thought I might post it here in case my logic is somehow flawed & the team can poke holes in my thesis.

Until yesterday, when considering the deal as if I was CRH, I’d been seeing their commitment as a willingness to risk US$40m in equity capital. Hmmm, $40m I thought. Pretty small fry for a company with an EBIT of €4B, but a big step up – in fact 20x the $2m in pocket change they’ve donated thus far. Not an insignificant amount to ‘risk’.

But then I realised, they’re not risking $40m if they sign. Not even close.

Before I get to that though, how about the $2m ‘donation’ in pocket change? In actual fact, if you go back to the Jan ’24 announcement, that $2m is actually purchasing the first hard asset to be owned by the JV:

“After commencement of the joint venture, FBR at its cost will as soon as practicable swap out the first Australian-spec Hadrian X® unit with a United States-spec Hadrian X® unit, title to which will be transferred to the joint venture at no cost to the joint venture.”

Now, as for the $40m. This is important. The $40m isn’t a single commitment of equity capital at risk if the JV fails. It’s a loan in tranches. Bet your bottom dollar that loan sits at the top of the ‘capital stack’. It’s secured with a lien on the JV’s assets, just like my mortgage is secured with a lien on my house.

When it comes to the loan, CRH aren’t an equity investor like me, they’re Commonwealth Bank lending to the Joint Venture. The loan is an asset for CRH, like my mortgage is to the bank. They’re providing secured finance for the JV to buy the machines, they’re not buying them themselves.

Plus, the loan is in tranches. Tranche #1 is $6m, & tranche #2 can’t be drawn unless the initial Hadrian fleet meets performance hurdles – until they prove that they’re profitable.

So, let’s review what CRH get if they sign:

• 49% equity stake (and profit share) in the new JV
• Exclusive rights on WAAS in the USA
• Title transfer of US-spec Hadrian #1 to the JV
• Principal & interest repayments on Hadrian loans
• First lien on assets should the JV fail
• Guaranteed supplier of CMU blocks to the JV

And what they risk if they sign by February 16:

• Initial commitment of $500k in JV working capital
• Proportion of $6m loan (Tranche #1) unable to be recovered should the JV fail & be wound up

Now disclaimer, I’m no Insolvency Lawyer. But for the purposes of my toilet roll analysis, let’s say CRH could recover 50% of capital if the initial Hadrian fleet isn’t profitable & the JV defaults on the loan.

That leaves us with the real number at risk here if they sign by February 16.

$3.5m.

Or, they write off their $2m in sunk costs to date.

The odds look a little different to me when you put them like that.