Fletcher Building Ltd (NZX & ASX: FBU) may have to consider upping its offer for Steel & Tube, but the biggest hurdle may be gaining Commerce Commission clearance.
Fletcher made a surprise $1.70 per share offer valued at $282 million, last week, which was promptly turned down by the steel manufacturer and supplier.
It has been estimated Fletcher and Steel & Tube's combined market share within the steel sector, valued at $2 billion to $2.5 B, would be more than 50%.
Forsyth Barr broker Damian Foster said Fletcher had long coveted Steel & Tube, but the timing of its proposal was “opportunistic,” following Steel & Tube's recent equity raising of $81 M.
“Clearly Fletcher has been dreadful at acquisitions, but if any acquisition makes strategic sense then it's Steel & Tube.
“It is New Zealand-based, a company and industry Fletcher knows well, with considerable potential synergies merging with its own steel businesses,” Foster said.
He believed Fletcher was likely the highest-value owner of Steel & Tube. Aside from the companies aligning on an agreed takeover price, Foster said the “key hurdle” was in gaining Commerce Commission approval.
While Fletcher showed signs of being confident, Foster highlighted the recent Commerce Commission decisions which had rejected the proposals of Vodafone and Sky, NZME and Stuff and insurers Vero and Tower.
“Those highlight predicting Commerce Commission decisions is difficult,” Foster said.
A merger would likely “over-step” the Commerce Commission's brightline test - that post-merger the merged entity's market share should be lower than 40% - and Foster said the approval hurdle may have already risen, given the outcome of the recent decisions.
Direct support from Steel & Tube's board was necessary to achieve a full takeover, given the high proportion of smaller, retail investors, he said.
“Fletcher has proposed acquisition through a scheme of arrangement, which has a lower hurdle (of acceptances required) than a takeover, but the offer needs to be actioned by the target company,” he said.
Foster said while the $1.70 offer by Fletcher was “rationally sound,” for Steel & Tube the $1.70, or even slightly more, may not feel like a reasonable offer.
“Yes, the company (Steel & Tube) has ambitions for significant medium-term earnings growth, but it comes with execution risk,” he said.
He also highlighted the steel sector was not easy industry to operate within, with significant competition, volatile demand, and pricing and profit margins which can all materially impact earnings.
*Simon Hartley is senior business reporter and assistant chief reporter for the Otago Daily Times.