Two days after its chief executive was in Australia talking about how it was interested in big acquisitions, but not necessarily in Australia because of thin margins, NZ’s biggest construction company, Fletcher Building, has given itself world scale by buying US-based Formica Corporation for almost $NZ1 billion.
FBU is paying $US700 million ($NZ977m) to buy Formica from private equity firms to add to the existing businesses it had in Australasia. The South American operations of Formica were retained by the owners, Cerberus and Oaktree.
FBU said it would also issue shares to raise around $NZ300m to help fund the acquisition which would be earnings positive in the 2008 fiscal year.
The Formica purchase is a bet by FBU that the presently strong NZ Dollar won’t have a long term impact on its earnings, as it has had already on groups like Fisher and Paykel Healthcare, Fonterra and other exporters.
The economics of the deal would have been helped by the proposed tax credit to apply to foreign derived income for NZ exporters. That is due to start next year.
Formica is a global manufacturer and distributor of decorative surfacing products with businesses in Asia, Europe and North America. It has 12 manufacturing and 33 distribution facilities spread across those regions.
It trades here under the Laminex Group Australasia name.Laminexoperates as a separate division within the Fletcher group of companies. Formica was acquired in 1999.
The Laminex Group has 7 production facilities in Australia and 5 production facilities in New Zealand.
The main product is high pressure laminate (HPL), but it also makes and distributes solid surface, compact laminate and engineered stone products, with emphasis on kitchens and bathrooms.
Fletcher chief executive, Jonathan Ling said the company would make contingent payments of up to $US50m if Formica achieves specific performance milestones once it had been acquired and bedded down.
Fletcher said that Formica had 2006 revenues of $US737m and earnings before interest, taxation, depreciation and amortisation (ebitda) of $US75m on a normalised basis.
Fletcher expected Formica’s ebitda, for the year ended 30 June 2008 on a normalised basis, would rise to $US94m before any synergies from the merger.
The deal is subject to regulatory approvals.
Fletcher’s Laminex business had revenues of just over $NZ1 billion in the June 2006 year.
Mr Ling said, “The acquisition provides a logical extension to Fletcher Building’s existing decorative surface laminates business.
“It would give Fletcher a chance to establish a truly global laminates platform and significantly increase the geographic diversity of its earnings exposure.
“Formica had high quality Asian manufacturing facilities and gave Fletcher the ability to source low-cost product into Australasia,” he said.
It was only last Monday that Mr Ling was quoted in the media as saying Fletcher was interested in acquisitions, but not in Australia because margins were tighter and growth prospects were lower because of the housing slow down.
He said he didn’t want to pay high valuations that many vendors were demanding. (So does that mean he managed to get a steal with Formica?)
Fletcher is already expecting a higher profit in the 2007 year because of a large one off item, as it told the market this week:
“Fletcher Building Limited announced today that the New Zealand Inland Revenue Department had concluded its audit review concerning the treatment of certain memorandum tax accounts maintained by the company with respect to its foreign sourced earnings.
“A tax benefit of $70 million was reported in the 30 June 2006 financial statements, but was fully provided against pending the outcome of this audit review will now be fully recognised, so increasing net earnings for the 30 June 2007 year by $70 million. At this stage it is anticipated that tax benefits of this nature will be non-recurring.
“The Inland Revenue Department has advised that no further action will be taken in respect of this matter, and as a consequence the tax benefit.”
