Soul Pattinson to unveil fresh acquisition
Institutional investor Perpetual, which has 12 per cent of both Soul Pattinson and Brickworks, has been agitating for the cross-shareholding to be unlocked, while Melbourne banker Mark Carnegie has made a quixotic attempt.
Following a detailed review, Brickworks director Rob Webster told analysts on Thursday that there could be considerable downside and not much upside from dismantling the cross-shareholdings.
"We see a lot of risk and costs in changing the current structure," he said. Specifically, there could be $700 million of prospective capital gains tax liabilities if shares in New Hope Coal ($600 million) and TPG (more than $100 million) were distributed to shareholders.
Toowoomba investment adviser Charlie Green said the push by Perpetual to unlock the cross-holdings "represents truckloads of shareholdings holding significantly more than the Millner family".
The one "glaring oversight" of the review, Mr Green said, was the "$350 million holding by the [Millner] family allows you to control $4 billion of investments".
Brickworks holds 42.7 per cent of Soul Pattinson, with Soul Pattinson holding 44.48 per cent of Brickworks.
The cross-shareholding was first entered into in 1969 to protect both companies from unwanted corporate raiders. "We've been very active the past six months looking for investment opportunities," Robert Millner told analysts when discussing the group's latest results on Thursday. "We hope to have something to report to the market in a week or so on one of those large investments."
With $1.6 billion on deposit at end-January, Soul Pattinson has plenty of firepower.
Brickworks continues to drag on the group's performance, with only a 6.6 per cent return on capital, which was "clearly still inadequate", managing director Lindsay Partridge said on Thursday.
Its earnings per share for the six months to January rose to 38¢, from 36.7¢, buoyed by property division gains, with building products earnings flat.
Anecdotal evidence pointed to a continued improvement in NSW, Western Australia and South Australia, he said.
A steady interim dividend of 13.5¢ has been declared. Soul Pattinson suffered a steep slide in earnings per share to 31.02¢ from 41.48¢, with the previous year's figure flattered by a gain from its stake in New Hope Corp. The interim dividend was raised to 18¢ a share from 17¢.
Soul Pattinson shares closed up 12¢ at $14, with brokers saying they were trading at "fair value" depending on the valuation placed on its large holding in New Hope.
Brickworks gained 33¢ to $12.88.
Frequently Asked Questions about this Article…
Soul Pattinson is finalising a large acquisition that the company says will be disclosed before Easter. Management told analysts they have been active for the past six months looking for opportunities and hope to report on one of those large investments within a week or so.
The planned acquisition is partly tactical: Soul Pattinson is seeking to shore up the group and keep at bay dissident shareholders who want to break up its cross-shareholding with Brickworks. Management framed the buy as part of searching for attractive investments while defending the group structure.
Brickworks holds 42.7% of Soul Pattinson, and Soul Pattinson holds 44.48% of Brickworks. That cross-shareholding dates back to 1969 and was originally set up to protect both companies from unwanted corporate raiders. For investors, the structure affects control, strategic decisions and the debate over whether the holdings should be unlocked.
Institutional investor Perpetual, which holds about 12% of both Soul Pattinson and Brickworks, has been agitating to unlock the cross-shareholding. Melbourne banker Mark Carnegie also made an attempt. Supporters argue unlocking could free up significant shareholdings, while critics warn of costs and risks from dismantling the structure.
Brickworks director Rob Webster warned a detailed review showed considerable downside and not much upside to dismantling the cross-shareholdings. Specifically, he said there could be about $700 million of prospective capital gains tax liabilities if shares in New Hope Coal (around $600 million) and TPG (more than $100 million) were distributed to shareholders.
Soul Pattinson had about $1.6 billion on deposit at the end of January, giving the company substantial firepower to pursue a large acquisition.
Brickworks reported a return on capital of just 6.6% and said earnings per share for the six months to January rose to 38¢ from 36.7¢, with a steady interim dividend of 13.5¢ declared. Soul Pattinson's earnings per share fell to 31.02¢ from 41.48¢ (the prior year was boosted by a New Hope Corp gain), but its interim dividend was raised to 18¢ from 17¢. On the market, Soul Pattinson shares closed up 12¢ at $14, while Brickworks gained 33¢ to $12.88.
Investors should watch for the formal acquisition announcement promised before Easter, monitor any further commentary from Perpetual or the Millner family about unlocking the cross-shareholding, and keep an eye on how brokers value Soul Pattinson’s large New Hope holding (which influences perceived fair value). Also be aware that reviews flagged potential large capital gains tax costs if the cross-shareholding were unwound.
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