Brambles recalls better times

It says something about the state of the globe that Brambles has aborted the protracted attempted sales process for its Recall information management division and announced a $448 million equity raising.

About 18 months ago, Brambles announced the $1.3 billion purchase of another pallet and logistics group, IFCO Systems. It planned to fund that acquisition, completed last year, by having its dividend reinvestment plan underwritten.

Subsequently – last August – it changed its plans and announced that it would instead sell its Recall unit. That sale process was expected to raise around $2 billion, some of which would be used to pay down the debt associated with the IFCO purchase and the remainder for a capital management program.

Recall is a very good business but one which has no logical fit with Brambles' core pallet operations. It has generally produced strong growth and strong returns on capital. It was expected to be highly sought after and it was, with both trade buyers and private equity showing interest.

Then, of course, Europe developed the wobbles and global markets became increasingly volatile and, in recent weeks, fearful after the outcomes of the Greek and French elections fractured the consensus on the austerity strategy the eurozone had been pursuing.

With weak and risk-averse equity markets, and junk bond markets in the US barely functioning, funding for an offer for Recall that met Brambles' asking price of around $2 billion was always going to be problematic. Brambles failed to attract an offer with sufficient value and certainty to make a sale palatable. So it has pulled it.

The decision to try to sell Recall had nothing to do with its performance. Brambles reaffirmed guidance for the division of between $US180 million and $US195 million of underlying earnings, which would represent growth on last year's result of between 19 per cent and 29 per cent. Recall was never a business for sale at just any price.

The failure of the sales process, however, meant Brambles was left with the IFCO acquisition debt and total debt of $US3.2 billion against equity of $US2.33 billion.

Presumably it again considered arranging an underwriting of its dividend reinvestment plan but it has gone with a vanilla and certain option, the $448 million renounceable rights issue. The one-for-20 issue is fully underwritten, so the funds are guaranteed.

That's another reflection of the external environment. No-one wants to go into another spike in the global financial crisis with anything other than a conservative balance sheet, not even a Brambles, with very solid earnings of just over $US1 billion (it also reaffirmed group earnings guidance today).

The issue will bring Brambles' debt and equity levels into balance, while retaining Recall also provides a measure of diversity within its earnings base.

It might have preferred to receive $2 billion of cash for Recall, paid down some of its debt and had a lump of cash to either give back to shareholders or hang onto as insurance against a global recession, but the capital raising is a prudent fall-back option in the uncertain circumstances.