20/05/2014 - 10:37

A Boral lure may tempt Buckeridges

20/05/2014 - 10:37

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Deutsche Bank’s latest analysis of Boral has rekindled debate over a potential move on the Buckeridge Group.

A Boral lure may tempt Buckeridges
OFFERS: BGC was targeted by Boral several times in the past, but Len Buckeridge remained firmly in charge of the business. Photo: Grant Currall

Deutsche Bank’s latest analysis of Boral has rekindled debate over a potential move on the Buckeridge Group.

Officially, the family of Len Buckeridge, the Perth building materials billionaire who died in March, say the Buckeridge Group of Companies is not for sale. Unofficially, hints continue to emerge of a possible exit route for the family.

Top of the list of potential buyers of BGC, if only because it has tried several times in the past, is Boral, one of the biggest suppliers of building materials in Australia.

As a business, Boral is effectively a mirror image of BGC … with two major differences – Boral is listed on the stock exchange and is big in the eastern states, while BGC is privately owned and dominates building materials in Western Australia.

The first clue that a deal might be brewing could be seen immediately after Mr Buckeridge died on March 11, a day when Boral’s share price closed at $5.82.

Two days later, as speculation developed about the future of BGC without its charismatic founder, Boral’s share price hit a 12-month high of $5.96.

Modest as that 14-cent rise was, it occurred over a two-day period when the ASX all ordinaries index slipped marginally lower.

It’s drawing a long bow but it is possible that some investors saw Boral as a natural future owner of BGC, with efficiency to come from integrating operations, especially in WA where Boral’s Midland Brick subsidiary has been forced to endure fine profit margins since BGC added bricks to its inventory of products.

Since that flash in the Boral share price, speculation of a bid for BGC has quietened, only to be revived in an unexpected way last week.

Deutsche Bank, in its latest analysis of Boral, warned that while the stock was a ‘buy’ with a 12-month price target of $6.18, there were a number of factors that could hurt the company’s future performance.

Top of the list was ‘the potential for large acquisitions’, followed by a slowdown in the Australia and US housing sectors, increased competition for cement, and cost-cutting initiatives not yielding the expected outcome.

Deutsche does not provide a list of takeover targets that could damage Boral’s share price and appears to simply be following the investment maxim that, in most takeovers, the bidder invariably overpays and the shareholders in the target do best from a deal.

Given the past fruitless attempts by Boral’s senior management to get close to BGC, however, there is little doubt that the big WA company will be back on its corporate radar screen with the critical questions being those of timing, price and whether the Buckeridge family is more interested in a deal than Mr Buckeridge ever was.

Only the family can answer the question of interest, and only Boral can answer the question of time. Price, however, is slightly easier given the near similarities between BGC and Boral.

As a starting point, should Boral bid, an offer of $2 billion might interest the Buckeridge family given that BGC has a turnover of $2.5 billion, roughly half that of Boral, which has a stock market value $5.3 billion.

It is the possibility of Boral dusting off its plans to acquire BGC that has investment analysts such as those at Deutsche worried about the price that might be offered, and whether such an acquisition would be earnings positive.

For the Buckeridge family there is the question of whether they want to continue with a business that was led by a single man from the day it was founded, and which reflects his unique personality, or whether a handsome cash offer from Boral would represent an exit route that would fund family members into their own businesses.

Passive pays off

Investment advisers, stockbrokers and fund managers have been having a tough time convincing potential clients they are worth the fees they charge; and that job’s likely to get tougher after the latest analysis of their work.

Hard on the heels of bruising criticism by one of the world’s richest people that ‘passive’ investments outperform active bargain hunting comes a British report that a do-nothing approach is best for most investors.

Last month it was multi-billionaire Warren Buffett on the attack via the early release of his will, in which he said he wanted the trustees of his estate to invest 10 per cent of the cash in short-term government bonds and 90 per cent in a ‘tracker’ fund such as the Vanguard 500 Index Fund, which simply reflects the collective value of the New York Stock Exchange.

About $1 billion flowed into the Vanguard fund following Mr Buffett’s comments.

Then came a study by the British government, which found that about $350 billion in deposit by various government agencies in 89 funds should be switched from active funds, which try and pick stock market winners, into passive funds that track the market.

Currently only 12 per cent of the British funds invest passively, but with active fund managers charging handsomely for their services (and rarely delivering promised returns) that proportion seems certain to grow substantially.

A changing world

One investment bank keen to offer its clients something different, if only to encourage them to not turn passive, is Merrill Lynch, which has warned clients that a changing world needs fresh investment thinking.

In a provocative research paper titled ‘The Thundering Word’ (a play on its nickname of The Thundering Herd), Merrill Lynch said there were 10 ‘disruptive’ themes emerging which include a global water shortage, a rising waste mountain, major reforms to government, changing energy production and consumption patterns, ageing populations, and technology change.

Among the thought starters to underline some of the points are provocative statistics, such as: 112,000 people in Japan, the US and Europe will reach a retirement age of 65 in the next 10 days; 97 out of every 100 births occur in developing countries; and there are 1.6 billion overweight people in the world versus 900 million undernourished.

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