Richard Inder: Ling stamps mark in steel

Six weeks into the job, Fletcher Building's new chief executive Jonathan Ling this week put his stamp on the firm.

It was not a huge move - the reorganisation of the building products division - but it was significant all the same.

The division, once the largest in the firm, lost its steel products operations to a new division under a yet-to-be-appointed chief executive.

The reorganisation followed the departure of the building division's head Andrew Reding, who - with infrastructure division head Mark Binns - lost out to Ling to replace Ralph Waters as CEO.

Had Reding still been in the job, Ling would have struggled to implement the change because it would have reduced his rival's power. Reding has since joined billionaire Graeme Hart's Rank Group in a role that remains unclear - and intriguing.

But with Reding out of the way, Ling was free to make what appears to be a sensible move. It forms a division on a more or less equal footing to the four others - infrastructure, distribution, the old building division, and laminates and panels (Ling's former stamping ground) - and gives the steel division's management much clearer objectives. It also gives greater visibility to the constituent parts of the whole business.

All this is useful for encouraging competition among divisional managers and good for promoting investor understanding of the company - which looks set to emerge as a theme of Ling's leadership. Its importance should not be underestimated.

Fletcher Building has been touted as a takeover target - not least because it trades on a multiple of earnings at a discount to its peers.

Waters was sufficiently concerned about the threat that he commissioned Deutsche Bank to analyse its cause and look at ways of solving the problem (including moving the head office to Australia).

The study concluded the discount was a product of Fletcher Building's reliance on New Zealand's volatile economy rather than the fact that it called the country home.

That, however, was cold comfort for Fletcher executives. In short, the company remains vulnerable until the volatility inherent in the firm's New Zealand earnings is muffled by contributions from overseas.

Ling is aware of the conundrum and this week told me he had a clear solution. He wants to build a greater following among retail investors in Australia, who may instead rate Fletcher alongside its Aussie peers.

Fletcher's brands, meanwhile, such as Laminex, are well recognised in the Australian market and would be used to boost investor interest. A lucid explanation of Fletcher's strategy and transparent proof of delivery will be keys to this strategy's success.

Fletcher should also benefit from a rejig in Australian indices that will enable Rupert Murdoch's News Corp to return to Australia's benchmark S&P 200 index. The media giant was ejected in 2004, when it shifted its headquarters to the US.

Fletcher is well inside the top 100 biggest firms in Australasia so, with other majors such as Telecom and Contact, it should be a shoo-in.

Investors should also expect more regular updates on developments in the business. Yesterday's disclosure that it had acquired an Auckland distribution business to bolt on to its Placemakers chain sets the standard.

It was not a big enough deal to move the share price, but it served to remind investors of the incremental growth opportunities and the strategy underpinning the entire company.

Ling, however, recognises that communication is just part of the equation and that growth by acquisition has to be a focus over the next year. This is not only because of the threat of a takeover, but also because Fletcher Building is rapidly developing the financial equivalent of bloat.

Thanks to its stellar performance over the past few years, the company is sitting on an embarrassment of riches.

Its debt as a proportion of enterprise value (debt plus equity) has fallen below its target level and the problem grows larger by the day.

Without a large acquisition in the coming year the board will have to examine returning some cash to investors. Such a move would be rightly treated by investors as an admission of failure and would hang heavily over Ling's head.

However, it will not be an easy win. Waters highlighted one of the biggest threats to this strategy in this year's annual report as he explained why the company had not made a major acquisition in the past 12 months.

"There is an increasing incidence in acquisitions of competition from private equity funds which, despite lacking the synergy benefits available to trade buyers like Fletcher Building, pay prices well beyond those that accord with our acquisition criteria."

Faced with such competitive pressure and an ever growing stash, the odds on Fletcher making a value- destroying move must grow, no matter the abilities of the new chief executive.

Ling says the acquisition of small fry, such as the deal disclosed yesterday, will relieve some of the pressure. These are companies typically too small for private equity firms.

Meanwhile, Fletcher will be looking further afield to markets that are not as flush with a state-imposed pension scheme.

But even Ling admits the stakes are high, saying such pressure comes with the territory. This admission is not a cause for gloom; quite the reverse: the risks should thrill investors as they are the worries of a successful firm.