Orica's heady times

Graeme Liebelt, the chief executive of Orica has moved to capitalise on the takeover bid the group received a fortnight ago from a private equity consortium, Bain Capital. Even though the $10 billion bid was rejected at first blush by the Orica chairman, former ANZ boss Don Mercer, Liebelt says the bid confirms Orica has cut its ties from the cyclicality of the mining industry.

As Liebelt suggests in today's video interview, senior mining executives, including Rio Tinto's Leigh Clifford, believe private equity takeover bidders are avoiding mining stocks because of their cyclical earnings. However, Liebelt claims the wisdom of Orica's diversification away from mining services in recent years was confirmed by the willingness of Bain to make its bid.

As Orica manages to keep trading at or close to the Bain-led bid offer of $32, Liebelt explains the difference the bid has made to the company and his plans for the future.

The interview

James Kirby: You’ve just reported a 70% increase in half-year profits. When was the last time Orica reported a profit like that?

Graeme Liebelt: I think it would be a very long time if you’re looking for a 70% improvement in profits, James. We were very pleased to see that come through as the culmination of a lot of work that’s been done in reshaping the portfolio of the business and some big investments that we’ve made over the past couple of years.

And can we expect you to report a 70% profit again in the near future?

Seventy percent on an ongoing basis is probably a bit rich, actually. The underlying earnings were up about 39% year-on-year and that’s reflecting the growth in the business that’s coming through from these investments that I mentioned. Going forward again, people need to make their own estimates and own assumptions about our performance, but we see stronger growth coming through in the near future.

Now much of that performance, of course, came from acquisitions such as Minova and, earlier, Dyno Nobel. Will we see more acquisitions from you?

Yeah, I think there will be further acquisitions, and the mining services sector is obviously an important one for us and we would expect to see more coming through in that region. We’ve been really happy with the Dyno Nobel acquisition, been very happy in the first three months with the Minova acquisition. We’d look for more in that space. But we have other opportunities in consumer products probably on a smaller scale – in chemical services, in our water treatment area, again on a smaller scale. So it’s not exclusively mining services, but given that mining is a big part of our business now there’s probably some sort of bias towards that sector.

Of course, Orica has been in the news for more than just its results. You’ve been one of the few companies in the market to reject a takeover offer. You rejected a $10 billion offer from a private equity consortium. Why?

Well the takeover offer was a bone fide offer from a consortium which put a proposal in front of us and we said, 'Well, we need to take the time to consult our advisers and reflect on this offer’, and we took about three weeks to do that. Having then looked at the value in the company, looked at the conditions in the bid, we decided to reject the offer following all of that work and that’s what we’ve done.

Yes, but will the offer itself make a difference to Orica in the future?

Private equity interest has had an impact on Orica in perhaps two ways. Number one is that we have been the subject of private equity speculation for some time and so we’ve considered what lessons there are for us in the way in which private equity manages business. Now that doesn’t mean that we as a company should manage in the same way as if we were owned by private equity, but in areas like cash management and speed of decision making, I think there are lessons that we’ve tried to take on board. Secondly, of course, the effect of the bid has been to have the stock re-rated recently and so expectations rise and we acknowledge that having rejected a bid for $32 then we, the management team, need to demonstrate that there’s at least that value and more in the company.

So is there now a takeover valuation built into the Orica share price whether you like it or not?

I think a takeover bid like this forces everybody to examine what value they could see in the company going forward. That’s happened internally at our board level, leading the board to conclude that there’s more value than $32 and you can see it happening externally in the market as well. And everybody who follows our company in detail is again reassessing their assumptions as well.

Now, Graeme, the curious aspect of the market at the moment is that mining services companies such as Orica are more highly rated than mining companies themselves. So something must change. Either you must drop to their rating or they must rise to yours. Which will happen?

Yes. I think you put your finger on the answer to that question in the question itself. That is to say that we are really exposed to the growth in volumes in the resources cycle and we think there’s every reason to believe that volumes will continue to grow strongly. That’s really driven by the need of countries like China for resources '¦ and not just China, by the way. There’ll be others that follow. Whereas the mining companies will also be exposed to the price cycle in commodities and, I guess, the discount that you see against mining companies is to a large extent due to people feeling that the price cycle is not going to stay at this level into the future.

So you’re saying that Orica is a safer play into the mining boom because you’re depending on volumes rather than prices? Is that right?

That’s right, and so we know the soar '¦ the rapid escalation in profits that the miners have seen as a consequence of both volume and price rising and, equally, we won’t see the de-escalation of profits that would happen in the event that prices were to fall.

Earlier this week, Leigh Clifford of Rio Tinto made the prediction that it’s unlikely the big mining companies will see takeovers because they’re too cyclical. But you’re a mining services company and you’ve had a takeover bid. How do you explain that?

I understand the point Leigh makes about cyclicality, and I don’t know if he’s right about the fact that they won’t bid for the mining companies. But I would make the observation about our business that with the way in which we’ve reshaped the portfolio to exit businesses like our plastics business and our fertiliser business, we ought to be rather less cyclical going forward notwithstanding some exposure to industries which will rise and fall to some extent. So I think actually in our case the private equity groups probably have looked at the business and felt that the cyclicality has reduced with time.