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Stokes moves to avert Caterpillar crawl in China

16 Nov 2012 THE AGE - COLIN KRUGER



THE economic slowdown in China has forced industrial and media conglomerate Seven Group Holdings to review its Caterpillar business in the region, which is expected to lead to extensive cost cutting to realign expenses with declining revenue.

The company also will review the Coates Hire business it co-owns with private equity firm the Carlyle Group to explore "ownership alternatives".

Seven executive chairman Kerry Stokes told the annual meeting in Sydney that it had been a challenging year for WesTrac in China and "we are currently working to ensure that our cost base there reflects this lower level of demand".

Seven managing director Peter Gammell said the company remained cautious about WesTrac China. "As a result, sales and earnings before interest, tax, depreciation and amortisation (EBITDA) for the region will be significantly down on the prior corresponding period," he said. "This is not China falling off a cliff, it's just about making sure you don't size up your business for a level that's not there."

Seven confirmed there were no such problems with its Australian WesTrac business, which reported a record result last year and accounted for more than 66 per cent of the company's earnings.

Mr Gammell said that while the absence of new mining projects would mean top-line equipment sales would return to more normal levels, this partly would be offset by a growing and recurring earnings stream from product support.

Seven and Carlyle have appointed Goldman Sachs to review Coates Hire, helped by CICC in China and Nomura in Japan.

It is believed the investment bank has a mandate to sell 100 per cent of the business, which reported a 22 per cent jump in revenue last year to $1.3 billion and a 40 per cent lift in net profit to $318 million.

The two partners attempted to float the business with a $3 billion valuation earlier this year.

"Clearly there is not an IPO market available at the moment, but we have had some inbound inquiries as a result of that whole process," Mr Gammell said after the annual meeting.

Mr Stokes said the overall outlook for Seven was strong and the company was expecting first-half underlying net profit of $200 million to $220 million.

The impending sale of Seven Group's $491 million stake in Consolidated Media Holdings to News Corp will further skew the company's earnings towards industrial services, which now provide 80 per cent of its earnings before interest and tax (EBIT).

The company said it remained committed to its media investment - a 33 per cent stake in Seven West Media.

"We see good long-term value in the company," Mr Stokes said.