Brambles in takeover spotlight

Speculation that Brambles is a takeover target is re-ignited as infrastructure newcomer Asciano buys a sizable stake in the business.
Rumours that the worldÆs largest pallet management company Brambles is ripe for takeover were running hot yesterday as the new Toll HoldingsÆ spin-off, Asciano Group, confirmed that it had bought a 1.76% stake in Brambles through the public markets.

At the same time, Brambles also confirmed that Toll Holdings had bought about five million shares, or just under 0.5% of the business.

The shareholdings were uncovered by Brambles during a routine check of the underlying beneficial owners of its shares. The check showed that two subsidiaries of Asciano, called National Rail Consortium and MS Corporate Services, held the shares through Macquarie Bank which had been instructed to purchase the stock back in late June. Toll HoldingsÆ shares were held in the name of Citigroup.

Analysts mulling over the move say that the routine check may have uncovered a plan by Asciano to take a bigger stake in the business and then announce a formal takeover. That plan has been thwarted, particularly now that BramblesÆ share price has sky-rocketed, rising 12% yesterday to A$12.69 per share.

It is also possible that Asciano was buying the shares as a speculative play û assuming that they would rise and could be sold at a profit. In a statement released yesterday, the company said it has a strong understanding of the Brambles assets, and that ôthe recent weakness in the share price had provided the opportunity for Asciano to make the investmentö.

ôIÆd be surprised if the move was purely to make money on re-selling the shares,ö says a transport analyst in Sydney. ôAsciano is structured as a trust but it is an operational business and its shareholders wouldnÆt be happy if management was trying to increase earnings by making speculative plays on undervalued stocks.ö

The analyst is more of the opinion that AscianoÆs on-market raid was uncovered before it had time to accumulate a larger stake. ôBrambles is a quality business and we have a share price target of A$14.45 on the stock,ö he says. ôFor the last two months the shares were trading around the A$10 and A$11 mark which made them cheap and left an opening for a strategic buyer.ö

If Asciano is planning to make a bid for Brambles, it will be a big purchase by a relatively new company. The asking price for Brambles is estimated at $16 a share, taking into account a control premium and the cost of outstanding options, valuing the business at around A$24 billion (including outstanding debt).

Asciano is only two months old, having been spun off from Toll Holdings in June this year. The company, which is structured as a stapled trust, contains TollÆs old port and rail assets. AscianoÆs share price traded up on debut, touching A$10.76, but has since traded as low as A$9. Yesterday, the shares were up 4.8% to A$9.44 when news of the Brambles stake was revealed. Asciano has a market capitalisation of A$6.9 billion.

ôThe fact that AscianoÆs shares havenÆt traded well since its listing doesnÆt put it in the perfect position to be making a large takeover,ö says the analyst. ôParticularly because it would need to fund the bid with a considerable amount of equity. Asciano would also need to raise a lot of debt and would probably be forced to spin-off business units like Recall in order to afford the transaction.ö

Recall is a document storage provider that meets the growing need for compliance-driven data storage, but it only represents a small portion of BramblesÆ earnings. The company makes about 85% of its revenues from its CHEP pallet business.

Brambles has been identified as a takeover target for some time with recent media reports suggesting that it would be the perfect asset for a private equity buyer. ôThe company has an undergeared balance sheet and generates strong consistent cashflows,ö says another equity analyst who covers the stock. ôBut it is also a business that suffers from inefficiencies brought about by its disparate global operations.ö

Private equity has been touted as a buyer of Brambles because the company isnÆt a natural strategic fit for a local company. There are no other pallet businesses in Australia and the company has a unique international footprint with businesses in the US, Latin America, Europe, Africa, the Middle East and Asia.

Brambles recently announced plans to rearrange its management structure, with the CHEP pallet business being carved into three separate units reporting into Australia. Last year, it merged its Australian and British operations under a single Australian holding company. It has also conducted several share buy-back programmes amounting to 20% of its total issued capital. But these streamlining exercises havenÆt necessarily impressed investors. Prior to the Asciano announcement yesterday, BramblesÆ stock was down 12% for the year. Disappointing sales figures from Europe are partly to blame.

Analysts say the purchase of shares by Asciano and Toll raises questions about whether the two companies might work together in a takeover bid. Asciano moved quickly to quell such suggestions yesterday by saying that it was not working with Toll and ôhas no intention of doing soö. Any collaboration would come under great scrutiny by the Australian competition watchdog.
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