Investment community welcomes Fletcher's $1.2b Formica sale

Fletcher Building chief executive Ross Taylor announced the deals. Photo/Greg Bowker

The investment community welcomed Fletcher Building's announcement of talks with Broadview to sell laminated and composite business Formica for $1.2 billion, with one specialist headlining a note 'Fletcher does something right for a change'.

Although the sale price for the American-headquartered business was just slightly under forecasts with a $1.3b top end, investment specialists saw the announcement as the first good news to come out of the business in ages.

Matt Henry of Forsyth Barr, Craig Lindberg and Grant Swanepoel of Craigs and Shane Solly of Harbour Asset Management welcomed the sale and the dividend reinstatement plan.

Henry said the sale was being negotiated in the midst of a market which had turned down since the initial announcement was made of the sale, so the deal was even more impressive when viewed in that light.

"It's a pretty good outcome, particularly given the volatilities we've seen in equity markets over recent months. There was some nervousness about how that could influence the outcome," Henry said, citing volatility in the United States and the United Kingdom, Formica's key market.

Craig Lindberg of Craigs described the deal as "a positive outcome" and estimated that after costs, Fletcher would net $1.124b.

"We are of the view that the Australian investors were expecting about $1b while New Zealand investors were anticipating $1b to 1.2bn with a mixed view as to whether a deal was definitely going to be concluded," Lindberg said.

Craigs predicted a share buyback, "particularly to counter its likely removal from the MSCI mid-cap index in March 2019. They might not have the confidence to initiate a material one ahead of the funds being received."

Swanepoel described the Formica announcement as a turnaround.

"Finally, we get some good news out of this company. It's been a while. It's a great outcome," he said of the sale, particularly because the buyer was a trade business. "That removes any regulatory approvals and means both parties are aligned. It's just the certainty of it. This is a deal that's done," he said of Fletcher quitting Formica.

The dividend reinstatement had been widely expected "but it's good the board had the confidence to come out now. These guys are going to have a fairly light balance sheet," he said, raising questions about an acquisition trail possibility.

Solly said: "Good to see the asset sale completed and this leaves Fletchers well capitalised to continue to restructure. It's good to see Fletcher board and management deliver on the sale process. It's an important milestone for the new team."

Henry also welcomed the dividend reinstatement: "These guys have now really repaired their balance sheet twice - first, raising equity this year and obviously now with Formica. So debt levels will be quite low," he said. That enabled dividends to be paid again but a share buyback was not the only instrument available to the business, Henry said.

Fletcher shares put on 33c at one point on Tuesday, rising to $5.16 after Taylor's announcement, before drifting back to close at $4.93, up 2 per cent for the day.

Taylor said the company had entered into an agreement to sell the business to Broadview Holding for US$840m or $1.226b and would again pay shareholders a dividend.

On the $1.2b sale proceeds, Taylor said it was important to first complete the sale, and that the company would continue to take a prudent approach to management of its balance sheet.

Fletcher confirmed its intention to reinstate dividends in the 2019 financial year, starting
with an interim dividend to be declared on finalisation of the half-year results on
20 February.

"The decision to reinstate the dividend was based on Fletcher Building Board's confidence in the company's trajectory and return to profitability in FY19. The board will size the dividend prudently, having regard to the ongoing capital requirements of the company," the statement said.

"Given the expected settlement timing of the Formica sale, the FY19 dividend is likely to be weighted towards the final dividend.

The $1.2b will be subject to deductions expected to be around $102m, including pension liabilities and other debt-like items retained in the business, and transaction costs, the company said.