Fletcher's offer too low, say analysts

Fletcher Building might need to increase the price of its A$740 million ($987 million) hostile takeover of the Australian Crane Group, two analysts say.

Keith Chua and Richard Bailey at JP Morgan in Sydney said an offer of A$10.32 a share, rather than Fletcher's A$9.35 combined scrip and cash deal, might be necessary to win the day.

"We would expect that an uplift in the A$9.35 offer price would be required," they said in an analysis headed "Fletcher patiently stalking a Crane".

Chua and Bailey calculated benefits from the takeover in terms of synergies gained by integrating Crane Group's operations into Fletcher, measuring this against earnings multiples including Crane's enterprise value, to assess the price offered.

These calculations implied a higher price on Crane's head than Fletcher had offered for the Australian building and plumbing supplies firm.

"Fletcher Building may need to lift its offer in order for Crane Group's board to recommend the offer to shareholders," the analysts said.

The analysis was issued just before Crane's board recommended against the deal, telling shareholders that the Fletcher offer ignored the synergies expected after the acquisition which included streamlining Crane's corporate functions, the use of a combined entity for the purchase of goods and services and joining the logistics and distribution networks of the two companies.

Philip King, Fletcher's general manager investor relations, this week challenged the J.P. Morgan analysts' conclusions.

"The proof of the pudding is how the market values Crane. Before the Fletcher Building bid, Crane's share price was trading in the mid A$7s, which is clearly what the market thought it was worth. Our offer, which on announcement day on December 15 was worth A$9.35, was at a 28 per cent premium to the average price over the prior month of A$7.28," King said.

"Crane's response to the offer to date has contained nothing that would suggest that the Fletcher offer implied value of A$9.35 was anything but compelling. Interestingly, the Crane share price is moving in lockstep with the Fletcher Building share price and trading around the offer value, which suggests the market is expecting our bid to succeed," King said.

Crane closed at A$9.67 on the ASX yesterday. Fletcher Building closed down 4c yesterday at $7.86 on the NZX.

Yesterday, Greg Sedgwick, Crane managing director, and Mark Fitzgerald, finance director, told the ASX that after Fletcher's bidder statement was issued on Friday, Crane would issue a target statement response on January 31.

The response was due on January 29 but Crane got clearance to extend the date from the Australian Securities and Investment Commission.

Craig Brown, Auckland-based senior investment analyst at institutional investor OnePath (formerly ING NZ ), which owns Fletcher shares, is enthusiastic about the Crane takeover.

"We are very comfortable with the strategic merits associated with this opportunity and are also happy with the timing."