Murdochs

The building products battle


July 21, 2021

Two versions of the battle for Boral story.

What next in the battle for Boral?

John Durie had an interesting piece in The Australian last Wednesday when he effectively urged Boral shareholders to sell into the $7.40 cash bid from the Kerry Stokes controlled Seven Group Holdings.

A lot has happened since this June 22 Eureka Report piece on the battle for Boral. Rather than exhorting 80,000 retail shareholders not to sell into a David Tweed like under-done takeover offer at $6.50, the reverse now applies with smart institutional investors having sold into the increased $7.40 cash offer and circa 65,000 retail shareholders being left as minorities in a Kerry-Stokes controlled company.

I agree with Durie and believe the Boral board should be advising shareholders to get out while they can, but instead they are actually doing what the billionaire wants and urging shareholders not to accept, citing the independent expert's valuation of between $8.25 and $9.13.

If there's one thing that stands out in the Stokes career it is his propensity to snap up assets which leave him over-leveraged and then open to controversial related party transactions to sort out his issues with banks.

Remember in the 1990s when the bloke seriously thought he could buy the whole of Optus. That was around the same time that he over-leveraged and bought 24% of Hollywood film studio MGM leading into the Asia crisis, before departing two years later for a small loss in a related party deal with billionaire partner Kirk Kerkorian.

After spending 20 years in partnership with fellow Perth mogul Jack Bendat doing property development and media, the two eventually parted company in the late 1980s when Stokes wanted to outbid Westfield founder Frank Lowy to buy Network Ten from News Corp and Bendat stuck by his mandate of only investing in WA.

This was a Stokes-saving decision because, as the billionaire's biographer Andrew Rules explains in this fascinating ABC podcast, he ended up selling a grab-bag of media assets to Frank Lowy 6 weeks before the October 1987 stockmarket crash.

The other debt-driven related party transactions after Stokes over-leveraged included the post-GFC sale of his privately owned Westrac to Seven Network for $2 billion in 2010.

This paid down more than $1 billion in private Stokes debt, but left the renamed Seven Group Holdings with excessive debt, something which was only fixed by another related party transaction two years later selling the conglomerate's television, media and online assets to the associated WA News for a ridiculous $4.1 billion in 2012, leaving the renamed Seven West Media group wallowing in debt.

As of Thursday night, Seven Group Holdings had received Boral acceptances of 56.84% and the offer is open for another 10 days, meaning that Stokes is in danger of being swamped with unwanted debt after unwittingly becoming Australia's biggest concrete mogul.

When Stokes' 57.5% owned conglomerate Seven Group Holdings first launched its $6.50 cash takeover bid for Boral in May, its stated intention was only to lift its stake in the building products giant from 23% to 30%.

Stokes was forced into lifting the offer when Boral adopted the unorthodox tactic of deploying its previously announced 10% on-market buyback by splurging on stock at prices well north of Seven's original $6.50 bid price.

Since the offer went unconditional on July 1, Seven Group has shelled out $2.74 billion in cash on Boral shares as the smart institutional money got out, tapping into the giant $5.5 billion margin loan which Westpac, ANZ and Barclays have bravely signed up for to fund the bid.

The media narrative is along the lines of “clever Kerry out-foxes Boral board” but there is a downside for Stokes in that with an unconditional bid he can't control just how much debt he will finish up with.

After completing a $530 million equity raising in May, Seven Group reduced its net debt down to $2.1 billion, so total debt has already risen to almost $5 billion and is rising fast. A construction lock-down in Sydney for two weeks might spook a few more shareholders into selling.

Heading into the 2021 Boral AGM on October 28, all Stokes really wanted was to ensure that he could secure the initially promised two Boral board seats after his original deal with the board last year was pared back to just one seat after a revolt by institutional shareholders led by Perpetual and investment banker John Wylie, an original investor in Eureka Report.

However, after Perpetual and Wylie surprisingly accepted for their combined 8% Boral stake, Stokes is now looking like having the unexpected pleasure of being able to install himself or son Ryan Stokes as chairman of Boral and hand-pick all of the directors, as he has been doing at Seven Group and Seven West for many years.

Stokes is promising to retain a majority of independent directors, presumably to present himself as a corporate governance good guy in order to persuade as many of the residual shareholders as possible not to sell.

Boral chair Kathryn Fagg promised to resign as a Boral director this year as part of a deal with Stokes to secure her re-election at last year's AGM, so she will definitely depart shortly. It is unclear which of the 5 remaining independent directors will survive now that Stokes has control. After taking control of WA News, Stokes effectively forced out all of the incumbent directors and sourced his own new “independent” directors.

There are currently 8 Boral directors and the constitution allows for a maximum of 12 directors. However, only one of the independent directors, Peter Alexander, is up for re-election this year, so if Stokes wants to quickly have a hand-picked majority whilst not removing incumbents, he will need to nominate up to 5 new directors at the upcoming AGM.

What next in the battle for Boral?

John Durie had an interesting piece in The Australian last Wednesday when he effectively urged Boral shareholders to sell into the $7.40 cash bid from the Kerry Stokes controlled Seven Group Holdings.

A lot has happened since this June 22 Eureka Report piece on the battle for Boral. Rather than exhorting 80,000 retail shareholders not to sell into an under-done takeover offer at $6.50, the reverse now applies with smart institutional investors having sold into the increased $7.40 cash offer and circa 65,000 retail shareholders being left as minorities in a Kerry-Stokes controlled company.

I agree with Durie and believe the Boral board should be advising shareholders to get out while they can, but instead they are actually doing what the billionaire wants and urging shareholders not to accept, citing the independent expert's valuation of between $8.25 and $9.13 a share.

If there's one thing that stands out in the Stokes career it is his propensity to snap up assets which leave him over-leveraged and then open to subsequent transactions to sort out his issues with banks. Don't be surprised if a cashed up Boral ends up merging with a debt-laden Seven Group Holdings.

Remember in the 1990s when Stokes seriously thought he could buy the whole of Optus. That was around the same time that he over-leveraged Seven and bought 24 per cent of Hollywood film studio MGM leading into the Asia crisis, before departing two years later for a small loss in a well negotiated deal with billionaire partner Kirk Kerkorian.

After spending 20 years in partnership with fellow Perth mogul Jack Bendat doing property development and media, the two eventually parted company in the late 1980s when Stokes wanted to outbid Westfield founder Frank Lowy to buy Network Ten from News Corp and Bendat stuck by his mandate of only investing in WA.

This was a brilliant decision in hindsight. As the billionaire's biographer Andrew Rules explains in this fascinating ABC podcast, Stokes ended up selling his regional television assets, including Channel Ten in Canberra, for a very good price to Frank Lowy weeks before the October 1987 stockmarket crash.

The other arguably debt-driven related party transactions driven by Stokes include the post-GFC sale of his privately owned Westrac to Seven Network for $2 billion in 2010, although this has turned into an excellent acquisition for the minority shareholders in Seven Group Holdings which has delivered in spades over recent years.

This transaction paid down around $1 billion in private Stokes debt, but only two years later we had another related party transaction when Seven Group Holdings and private equity giant KKR sold their television, media and online assets to the associated WA News for a ridiculous $4.1 billion in 2012, leaving the renamed Seven West Media group wallowing in debt for the past decade.

As of Thursday night, Seven Group Holdings had received Boral acceptances of 56.84 per cent and the offer is open for another 10 days, meaning that Stokes is in danger of being swamped with unwanted debt after unwittingly becoming Australia's biggest concrete mogul.

When Stokes' 57.5 per cent owned conglomerate Seven Group Holdings first launched its $6.50 cash takeover bid for Boral in May, its stated intention was only to lift its stake in the building products giant from 23 per cenet to 30 per cent.

Stokes was forced into lifting the offer when Boral adopted the unorthodox tactic of deploying its previously announced 10 per cent on-market buyback by splurging on stock at prices well north of Seven's original $6.50 bid price.

Since the offer went unconditional on July 1, Seven Group has shelled out $2.74 billion in cash on Boral shares as the smart institutional money got out, tapping into the giant $5.5 billion margin loan which Westpac, ANZ and Barclays have bravely signed up for to fund the bid.

The media narrative is along the lines of “clever Kerry Stokes out-foxes Boral board” but there is a downside for Stokes in that with an unconditional bid he can't control just how much debt he will finish up with.

After completing a $530 million equity raising in May, Seven Group reduced its net debt down to $2.1 billion, so total debt has already risen to almost $5 billion and is rising fast. A construction lock-down in Sydney for two weeks and yesterday's biggest one day drop on the ASX200 in four weeks might even spook a few more Boral shareholders into selling before the July 29 deadline.

Heading into the 2021 Boral AGM on October 28, all Stokes really wanted was to ensure that he could secure the initially promised two Boral board seats after his original deal with the board last year was pared back to just one seat after a revolt by institutional shareholders led by Perpetual and investment banker John Wylie, an original investor in Eureka Report.

However, after Perpetual and Wylie surprisingly accepted for their combined 8 per cent Boral stake, Stokes is now looking like having the unexpected pleasure of being able to install himself or son Ryan Stokes as chairman of Boral.

Stokes is commendably promising to retain a majority of independent Boral directors, a move which presents himself as a corporate governance good guy and might persuade some residual shareholders not to sell.

Boral chair Kathryn Fagg promised to resign as a Boral director this year as part of what critics claim looked like an informal deal with Stokes to secure her re-election at last year's AGM. She is expected to depart shortly. It is unclear which of the 5 remaining independent directors will survive long term now that Stokes has control. After taking control of WA News, Stokes supported the recruitment of new independent directors, mainly because the old guard lamentably quit en masse.

There are currently 8 Boral directors and the constitution allows for a maximum of 12 directors. However, only one of the independent directors, Peter Alexander, is up for re-election this year, so if Stokes wants to quickly move to a majority of fresh directors whilst not removing incumbents, he will need to nominate up to 5 new directors at the upcoming AGM.

The Stokes raid on Boral is unprecedented in many respects. You have to admire the chutzpah of a billionaire who can just splash circa $4 billion in cash on an un-related public company. The brazen 1980s-style raid has effectively triggered the break-up of Boral as the US business is liquidated in a series of sales that will leave Boral as a cash box with close to $3 a share in cash.

The trick going forward will be how to deploy that cash to pay down Australia's biggest margin loan. A giant capital return wouldn't be as tax effective as a merger between Boral and Seven Group, so my money is on that move by one of Australia's canniest and successful billionaire investors.