Stokes outfoxes the Boral board

Source: Financial Review.

Control of Boral is changing hands without a decent premium thanks to a masterful strategic play by Kerry Stokes, who was up against a board with poor defences.

West Australian billionaire Kerry Stokes is in the middle of pulling off the “bargain of the decade” with his purchase of effective control of building and construction products group Boral.

That’s the view of Sandon Capital’s Gabriel Radzyminski, who made a handsome profit on his Boral investment as the stock rose from a low of $2 in March last year to $7.39.

Radzyminski is one of several shareholders who pushed the Boral board to unlock value and then sold out. Others to do this were John Wylie’s Tanarra Capital and Paul Skamvougeras at Perpetual Investments.

Wylie warned Boral chairman Kathryn Fagg in February last year that unless the board executed a value creation plan someone would buy 30 per cent of the company and gain control.

Stokes now has his hands on 35 per cent of Boral’s issued capital and is likely to move towards 40 per cent ownership in the final week of Seven Group’s takeover offer, which is pitched at $7.40 a share.

His next step is to have his son, Ryan, who is chief executive of Seven Group and a director of Boral, to take control of the Boral board.

Chanticleer envisions Stokes jnr following the lead of the ARA Real Estate representative on the board of Cromwell Property Group, Gary Weiss.

Weiss became chairman of Cromwell after a bitter proxy fight that saw effective control of the company move into the hands of ARA which owns 29.8 per cent of the company. Weiss is searching for a new Cromwell CEO.

The Stokes family may not get rid of Boral CEO Zlatko Todorcevski. But they are sure to want a boardroom shake-up. Fagg has already said she will leave this year.

Seven Group’s successful use of a takeover strategy that was pioneered by corporate raiders in the 1980s means about two-thirds of Boral’s shareholders were never offered a decent premium for control of their shares.

The premium paid for control of a company is usually about 30 per cent. Although sometimes the buyer is so keen the premium will be in excess of 40 per cent, as in the Sydney Aviation Alliance bid for Sydney Airport.

In this case, the premium being offered by Seven Group is 13.8 per cent.

This raises the question as to whether or not the Boral board should change its recommendation to Boral shareholders to reject the Seven Group offer because it undervalued the company.

Chanticleer believes the board should follow the lead of directors at companies that have changed control.

In July 2018, mining company Mineral Deposits changed its recommendation to shareholders from a rejection to acceptance after a takeover bid resulted in Eramet SA gaining control of 43.4 per cent of the issued capital.

Stokes is a master of gaining control of companies without paying a premium for control. He did it with West Australian Newspapers and Beach Energy.

In the Boral case he has used a combination of the creep provisions of the Corporations Act, which allows a shareholder with more than 20 per cent to purchase 3 per cent of the issued capital each six months, and a low-ball takeover offer to gain control.

How Stokes played hedge funds to advantage

The evolution of capital markets over the past 30 years, including the emergence of hedge funds and takeover arbitrage funds, has played into the hands of those seeking control of a company without a decent premium.

The Seven Group’s takeover started with a nil-premium offer of $6.50 a share that was outbid in the market by 50¢ to 60¢ a share.

Hedge funds and arbitrage funds piled into the stock between $6.85 and $7.10 a share with seemingly immense confidence the Seven Group offer would be lifted.

The hedge funds which followed this strategy have probably made annual returns of between 70 and 100 per cent.

Boral’s board had an opportunity to keep Stokes at bay last year when Seven Group requested and was granted two board seats. This was an opportunity for the Boral board to negotiate a standstill agreement with Seven in order to keep its shareholding at 23 per cent.

Stokes may not have agreed to that, but it was the only time the Boral directors had any leverage over the situation. Seven Group only got one board seat after Tanarra and Perpetual kicked up a stink.

Seven’s presence will be felt on the board

Radzyminski says Seven Group will heavily influence the Boral board if not control a company with up to $6 billion in excess capital.

“If the bulk of that almost $6 billion of excess capital is returned to shareholders, Seven could effectively have a negative cost outlay to own more than 25 per cent of a high-quality Australian construction materials franchise, as well as a landfill royalty that will generate cash flow for decades to come,” he says.

“The Australian construction materials business has significant strategic advantages and a plethora of operational improvement opportunities. In years to come, many will likely rue the day they sold their shares.”

Shareholders who stick with Boral will be relying on the Stokes family to keep finding undervalued assets and exploiting the market’s lack of appreciation of their potential.

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