The Distillery: Ansell's stretched glove?

Jotters laud Ansell’s big US acquisition, but one asks whether the asset’s previous private equity owners might have stripped out some value.

The commentariat doles out plenty of praise to glove maker Ansell’s move to purchase its biggest fish since coming into being in 2002.

Amid plenty of puns about gloves fitting, commentators agree the decision to pay around $670 million for Illinois-based BarrierSafe Solutions plugs the gaps in Ansell’s US operations. It also signifies the group’s divisional focus, with its condom business no longer a key market, according to one scribe.

Elsewhere, superannuation changes are afoot; with one jotter arguing it’s time tough changes were made to archaic governance regulations.

First to Ansell, where Fairfax’s Malcolm Maiden asserts that the deal “goes hand in glove with what it already owns”.

“The Australian-based group is … buying a company that has leading market shares in segments of the US disposable glove market where Ansell is either a smaller player, or absent … BarrierSafe Solutions International fills a geographical gap, too. Ansell is currently sourcing 42 per cent of its revenue from Europe, the Middle East and Africa (EMEA), 31 per cent from North America and 20 per cent from the Asia-Pacific.”

Assuming regulators have no concerns with the deal – which is likely given the limited overlap in operations – Ansell’s North American revenue share will rise to 42 per cent, above EMEA at 35 per cent and Asia-Pacific at 20 per cent.

Meanwhile, The Australian’s John Durie believes the “big leap forward” from recent bolt-on deals in the tens of millions is a sign of the direction Ansell’s chief executive Magnus Nicolin wants to take.

“Nicolin wants to follow along much the same lines as Ken MacKenzie at Amcor, concentrating in key sectors where he has market leadership, and protective healthcare is the new mantra. Ansell is still in the condom business, but surgical gloves, protective clothing for the oil and gas industry and supplying the US military are its key markets.”

Business Spectator’s Stephen Bartholomeusz agrees, though its lack of strategic buys in the condom sector may be more through necessity than choice.

“In its traditional condom and surgical categories there isn’t much scope for significant acquisitions, but Ansell has been looking to the far more fragmented industrial and specialty categories for growth. BarrierSafe is the biggest player in the industrial, dental, life sciences, auto aftermarket and emergency medical services segments of the single-use glove verticals … (It also) has a bigger distribution system than Ansell in the US, where it believes it has been under-represented.”

The deal represents Ansell’s fifth purchase since July 2011, but the first above $150 million in a sign of how highly it values this deal.

The main question mark may surround private equity, which has had its hands on BarrierSafe on several occasions over the past decade, as The Australian’s Tim Boreham explains.

“A cardinal rule of business is to be wary of buying from private equity. In the case of … BarrierSafe Solutions, the asset has been shuffled between three private equity alliances since 2004. Cognisant that BarrierSafe has changed hands more [often] than one of its products, chief executive Magnus Nicolin says the due diligence team was especially wary of the owners stripping out research and development and marketing costs to dolly up the numbers.”

Private equity often strips out any fat in a business to extract as much profit before selling, which can leave businesses short on growth prospects and firms paying over the odds. However, given the multiple paid was below its own and around a similar mark to what it offered two years ago when it was outbid for BarrierSafe, Ansell is confident it won’t regret its latest foray into America.

Elsewhere, Fairfax’s Adele Ferguson mulls the super reforms that will be put on the table with the imminent release of a discussion paper from Treasury.

“The government is committed to a level of mandatory independence on super boards, which the industry expects it to deliver. The two issues it needs to work out are how many independents would be needed and how to define independence … Australia's super is expected to balloon from $1.7 trillion to an estimated $8 trillion by 2039-2040, so it is imperative that people trust the system.”

It’s about time governance procedures were brought into line with those in place for ASX-listed companies, Ferguson contends. And the debate is about to ramp up, according to The Australian’s Glenda Korporaal, who agrees the independence of directors will be a significant point of conjecture.

“The industry superannuation sector has always insisted that the equal representation model of trustees is one of the strengths of the sector. But the Cooper report into superannuation and others have called for more independent directors on industry superannuation funds. The Cooper report argued that a third of the trustees of a super fund should be considered independent.”

In company news, the scrap for Warrnambool Cheese and Butter continues with Saputo pulling out all stops for victory, according to The Herald Sun’s Terry McCrann. The other suitors might not be able to fend it off, but one – Murray Goulburn Co-operative – has a great fallback option if it chooses to sell its stake to Saputo. McCrann says Murray Goulburn could fight fire with fire by accepting cash for its 18 per cent stake and directing it toward signing up WCB farmers on supply deals.

That’s one way to say ‘Welcome to Australia’.

In resources, Rio Tinto has made another step toward closing its Gove alumina refinery, with 2014 likely to usher in the end, The Australian Financial Review’s Matthew Stevens suggests. Given Rio Tinto’s addiction to slimming down, it would be hard to mount a case to retain the loss-making asset much longer. Sadly that means around 1500 jobs may be at stake.

Fellow ASX20 stock Woolworths has its own problems, with the Masters hardware business coming in for plenty of criticism. While the company has every right to defend the “high risk” entry into Bunnings’ territory, Business Spectator’s Bartholomeusz outlines the challenges ahead and mistakes already made which mean the retailer is confronting an uphill battle.

The economy, too, might have a big problem over the next few years, with The Herald Sun’s McCrann noting that yesterday Reserve Bank deputy governor Phil Lowe touched on a theme for the next decade: Is Australia ready to move on from the China boom? The answer appears to be ‘not yet’.     

Finally, the AFR’s Chanticleer columnist, Tony Boyd, delves into the world of activist investors, specifically Robert Millner. In a dose of irony, Millner was yesterday successfully leading an overthrow of the Dart Energy board while also protecting the cross shareholdings between Soul Pattinson and Brickworks.