THE DISTILLERY: BlueScope snap

Jotters review BlueScope's latest venture, but one finds the overwhelmingly positive reaction may simply be due to lowered expectations.

Since the global financial crisis BlueScope Steel’s very survival has been at threat and every Australian business commentator has known it. Thus, the company’s reawakening via the Nippon Steel joint venture that’s left it with no net debt and a stronger share price has generally impressed. However, one commentator discusses the bonus that BlueScope boss Paul O’Malley passed up, while another contends that, like with Downer EDI, BlueScope has done a great job lowering expectations.

The Australian Financial Review’s Matthew Stevens was taken by how quiet the whole thing with the Japanese company was kept, given the benefits that BlueScope was in line for.

"All things moving to plan, the joint venture will recast BlueScope’s balance sheet as profoundly as it will its Asian product mix. Nippon Steel, which will be the world’s second-biggest steelmaker on the completion of its takeover of Sumitomo, will pay $US540 million for a half share of a coated steel business assessed to have an enterprise value of $US1.36 billion. BlueScope will emerge from this deal with zero net debt, a product range far better suited to Asia’s emerging demand for home appliances, and the apparently real potential that the sale will result in this business delivering a somewhat larger contribution to BlueScope’s bottom line in the medium term.”

The Australian’s John Durie says that the agreement has to be described as great for BlueScope given the position the steelmaker has sunk to.

"The question whether O'Malley would have sold his coated products division into the joint venture five years ago at the top of the bull market is a hypothetical one, but the answer is probably no. The reality facing O'Malley is vastly different and he is to be commended for making some tough calls during the past two years. He pulled the plug on steel exports just as predecessor Kirby Adams shut the steel plate mills, which means steel can makers in Australia have to rely on imports. On the positive side, through the cycles BlueScope has maintained its commitment to research and technology, and in fact first started talking with Nippon a few years ago when they were both trying to patent coated steel products. Rather than battle it out in the patent courts, they decided to work together, culminating in the joint venture.”

Business Spectator’s Stephen Bartholomeusz argues that the near 50 per cent spike in BlueScope shares yesterday (they finished up 34.6 per cent) was as much a relief rally as a revaluation.

"While the broader implications of the proceeds from the joint venture for BlueScope’s future are perhaps the most significant aspect of the announcement, it also says several positive things about the business BlueScope has built in the region and in the US and its future. The price tag obviously validates the worth of the business but introducing Nippon Steel as a partner should transform it. Nippon Steel has customer relationships within the region that BlueScope couldn’t replicate on its own. It also has its own technologies and products. It is instructive that the joint venture believes it can add incremental EBITDA of as much as $US75 million by 2017 to the growth profile of the existing business, which generates about $A115 million of EBITDA.”

Fairfax’s Adele Ferguson points out that BlueScope’s O’Malley decision not to take his bonus comes as company boards deal with increasing pressure from shareholders not to hand out big bags of money to executives when the company isn’t doing well – it sounds so simple, doesn’t it.

"In the past few months, companies with share prices that have fallen below the book value of their assets have received letters from the corporate regulator warning them about the need to justify these carrying values by conducting full blown impairment tests. Boards have also been meeting with investors and proxy groups to discuss executive pay before the annual meeting season. The message they have received is there will be no tolerance for generous packages in those companies that have watched their share prices get torched and even less tolerance for those who hit them with asset write-downs this reporting season. With 108 companies, including BlueScope, suffering a ‘first strike’ – a ‘no’ vote of 25 per cent or more – against their remuneration reports last year, many have decided not to test the ‘two strike’ rule this year, which could trigger a board spill.”

And Fairfax’s Ian Verrender has some fun at the expense of O’Malley and Downer EDI’s boss Grant Fenn.

"Secrets to Stockmarket Success, the new expose by Grant Fenn and Paul O'Malley, has been hailed by critics and investors alike. In this tell-all tome, two of Australia's best-known bizoids reveal the inner workings of the stockmarket and how to enjoy enormous success against all odds. Released yesterday in simultaneous launches at Downer EDI's earnings result and BlueScope Steel's life-altering joint-venture announcement, their revolutionary strategy provides a blueprint for those seeking to impress a jaded and disillusioned investment community. The key, apparently, revolves around managing expectations.”

In other company news, Fairfax’s Insider columnist Ian McIlwraith says Alesco Corporation is considering accepting DuluxGroup’s improved offer.

Meanwhile, Fairfax’s Michael West continues his campaign against a plan to dump toxic waste into the historic mine in Beaconsfield, Tasmania.

The Australian Financial Review’s Chanticleer columnist Tony Boyd finds the Australian Securities and Investments Commission increasingly concerned about algorithmic trading. The same newspaper’s Jennifer Hewett says we can kiss goodbye any hope of a consensus in the debate on corporate taxes.

And finally, The Australian’s Paul Garvey doesn’t have to look hard to find examples of Chinese state-owned companies getting up to no good in M&A discussions with Australian players. Such an argument would theoretically vindicate those who are uneasy with Chinese investment in Australia.

However, the writer then goes on to make two points, right at the end of his piece. Firstly, the market has changed significantly while the drawn out talks he discusses have taken place. Secondly, the Chinese companies are merely acting in the interest of their shareholder – Beijing. Shareholders in Australian companies demand the same behaviour.

By writing the piece that way, Garvey plays with his audience a little. The Distillery loves this.

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