Did Kerry Stokes’ Seven Group Holdings really want to get more than 50.01% of the issued capital of Boral and take on all the problems of a majority-owned subsidiary?
While Seven Group now holds 48.41% of Boral’s issued capital as at Tuesday under its $7.40 a share offer, in reality it controls the company.
Seven Group’s offer closes today (Thursday). It can be extended, but will it?
Boral has reduced the size of its issued capital (1.15 billion shares) by more than 122.5 million shares in its buyback which ended yesterday. That leaves roughly 1.038 billion Boral shares on issue.
Deduct the 122.5 million shares bought back from the 1.15 billion on issue and Seven group’s 48.4% (of the unreduced issued capital) is more than 51% of the new, reduced capital and control.
Boral spent more than $859 million on the buyback which in effect saved Seven from spending the money and incurring more debt.
Seven Group’s stake on Tuesday was 534.040 million shares.
The question now is does Seven and the Stokes camp want to go further, it has control. There is a considerable cost involved running two separate companies without being to full access the assets and cash flows of the partly-owned group.
So far Seven Group has committed to spend around $2 billion on building its stake at $7.40 a share. Around half of the 45% or 23% was bought before the bid was launched in May. That lowers the cost to Seven Group because many of the shares were bought well under the $6.50 initial offer price.
But if Seven wants to go to 100% it will have to pay more – another $4.4 billion. With high debts of its own, does Seven want to do that when it can control the company and accept the costs involved in running a separate group?
Boral will have close to $3 billion or so in cash from the sale of its US businesses last month (less the money spent on the buyback), which could be used to lower the entry cost for Seven Group.
Ending the offer at close of business today might be the smart thing to do.
That would give Seven Group access and voting control of the board and enough to pause, assess the situation.
Seven will have to face up to the doubts about its debt level exposed by ratings group S&P global in a letter to Boral last Friday.
S&P placed Boral’s debt ratings on credit watch negative due to concerns that Seven’s increased shareholding could “act as a drag on Boral’s credit profile.“
“We believe the current shareholding increases the likelihood that Seven can exert direct or indirect control over Boral to the extent that it could influence Boral’s strategy and disposition of cash flows,” S&P said.
“The CreditWatch negative placement reflects our opinion that the combined credit quality of the Seven/Boral group is likely to be lower than Boral’s on a stand-alone basis, which could act as a drag on Boral’s credit profile.”
Boral has $2.5 billion in debt with most of that due in 2024 and 2028. Seven Group has $3.2 billion in debt with more than half of it due within two years.
S&P also warned it was not clear if “sufficient conditions exist to insulate Boral from the potentially negative influence of the Seven Group” because Boral will get a lot of money from the sale of USG Boral and its North American business.
S&P is worried Seven won’t maintain Boral’s balance between shareholder returns and balance sheet repair. The rating agency said it will now take 90 days to finalise the extent to which Boral can “be insulated from Seven’s influence”.
With interest rates low, a negative credit rating would not be a big problem and the cash flows in Seven Group from its businesses dealing with the mining and infrastructure sectors will continue to be substantial.
Boral shares fell to $7.35 yesterday with the buyback over and removing upward pressure on the price.
