Brambles bets on energy with its Ferguson buy

When Brambles demerged its Recall information management business it finally shed the last vestiges of its conglomerate past. The query over the continuing group was whether it could generate anything other than incremental growth from its pallet-dominated “pooling solutions” business.

The announcement today that Brambles will acquire the UK-headquartered Ferguson Group for about $US545 million, however, points to a secondary strategy that chief executive Tom Gorman is pursuing as he seeks to diversify the group’s earnings base while continuing to drive efficiencies through its relatively mature core.

Ferguson provides container solutions ranging from general cargo-carrying units, to accommodation modules to more specialised modules to the offshore oil and gas sector.

That makes it a neat fit with the smallest of Brambles’ three mainstreams of business. The biggest and most established, of course, is the pallets business that accounts for about two-thirds of the group’s $US5.4 billion of sales.

The second, built around the $1.3 billion acquisition of Germany’s IFCO Systems in 2010 and accounting for about 17 per cent of group sales, is its reusable plastic containers business.

The third is its containers business, which generated only about 7 per cent of the group’s sales last financial year.

Ferguson, with about $US90 million of sales in 2013 and with sales growth of about 11 per cent compound since 2009, will bulk up that business by about 20 per cent, or about 9 per cent of group sales, and give Brambles a stronger presence in the oil and gas sector. Brambles already has a business that services oil refineries.

Ferguson fits Brambles’ criteria for an acquisition. It looks for common platforms with multiple customers where its expertise in asset pooling and use enables it to deploy its competitive advantage within industry sectors and, over time, create a network advantage that is difficult to challenge.

The UK group is a global business that services the biggest offshore oil and gas contractors and service companies -- about 800 of them -- via five hubs in the UK, Norway, United Arab Emirates, Singapore and Australia.

It is a growth business with a 10-year record of rising sales and earnings. It had earnings before interest, tax, depreciation and amortisation of about $US48 million in 2013 and Brambles says the acquisition price is a multiple of 10 times forecast 2104 EBITDA, which implies EBITDA of about $55 million this year. Ferguson’s EBITDA margin has been above 50 per cent in recent years.

After what Brambles said has been a period of significant investment, it believes Ferguson now has increased earnings leverage and that the debt-funded deal will be earnings per share accretive within the 2015 financial year. Longer term it sees Ferguson as an entrée to a very large and high-growth market.

In the context of Brambles, which has a market capitalisation of almost $15 billion, Ferguson isn’t a major acquisition. It does, however, illustrate Gorman’s strategy within the containers business of targeting industry segments where Brambles can bring its pooling expertise to bear to create and entrench leadership positions.