Fletcher’s Crane bid at low end of independent expert range

Fletcher’s Crane bid at bid at low end of independent expert’s value range

Feb. 4 (BusinessDesk) – Fletcher Building Ltd.’s cash-and-scrip bid for ASX-listed Crane Group Ltd. is at the low end of the value range identified by independent experts Ernst & Young, making it vulnerable in the event that Fletcher shares fall prior to the offer closing.

The E&Y independent expert’s report, released today with documents for Crane shareholders in which directors recommend the Fletcher bid, says Crane, a pipe and plumbing supplies firm, is worth between A$9.92 and A$11.56 a share, including a premium for control and integration benefits that may be in the range of A$20 million.

It places the value of the Fletcher bid at A$10.07 prior to a pending interim dividend, based on Fletcher’s closing share price of A$6.06 on Feb.2, and ascribes a value range for the Fletcher offer of between A$9.78 and A$10.10 per share. Variability occurs because the offer includes Fletcher shares as well as cash and a special Crane dividend. E&Y calculates Fletcher shares as being worth between A$5.78 and A$6.10, ex-dividend.

“While we have concluded that the offer is fair, we note that the lower end of our assessed range of values of the offer consideration falls below our assessed range of values for a Crane share,” said E&Y. This was a particularly relevant consideration for any Crane shareholder intending immediately to dispose of Fletcher shares after the transaction was completed.

The implied offer value gave Crane an implied price-earnings ratio of 20.6 times, compared with 15.2 times at the share price prevailing before Fletcher mounted its bid, and a 43% premium on the volume weighted average price of Crane shares in the month prior to the announcement date.

E&Y also noted that Fletcher is buying Crane at the bottom of the economic cycle, with earnings before interest in tax hitting a 10-year low in the 2010 financial year, 36% lower than ebit achieved in 2008.

Among potential reasons for Crane to perform better in the short to medium term were the potential to win work on major, emerging Queensland coal seam gas projects; a rebound in mining industry investment with mining tax issues now resolved; the federal broadband project’s likely demand for conduit pipes; recovery in the Australian construction sector; and increased government spending on water infrastructure.

Conversely, the potential for Fletcher to be included in ASX indices owing to its increased market capitalisation and new rules governing inclusion of New Zealand and Papua New Guinea-based companies in such indices could stoke demand for shares of the merged group from institutional investors.

The report also discloses that any new bid received during the offer period, which closes on Feb. 25, will trigger a five day response period for Fletcher, and that an A$8 million break fee may be payable by Crane if a better offer is accepted.

Discussions with other potential bidders were halted on Jan. 29 under the implementation agreement between the two companies.

While it would be reasonable to expect operational synergies to drive savings and higher earnings, E&Y noted that Fletcher “has not had access to the information that it would require to confirm the availability, timing and quantum of potential synergy benefits.”

The combined businesses recorded annual revenues of A$7.28 billion in their last financial years, with Crane’s revenues totalling A$1.86 billion.

E&Y warns Australian shareholders of Crane that Fletcher’s greater exposure to the New Zealand economy, and its activities in Europe and the U.S., will change shareholders’ country and exchange rate risks, and that they can no longer expect 100% imputation credits – known as franking credits in Australia – on the merged group’s dividends. The combined group would shift Fletcher from having the 66th largest market cap in the Australian market to be around 57th, and the group would be “the largest Australasian building materials company by market cap.”

Fletcher Building shares were trading today on the ASX and A$6.07, up 0.2%, and on the NZX at NZ$8.01, a rise of 1.26% from yesterday’s close.

(BusinessDesk)

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