Opinion
Kerry Stokes thumbs a well-worn playbook for ‘$8 billion’ Boral bid
Stephen Bartholomeusz
Senior business columnistKerry Stokes’ ‘$8 billion’ bid for Boral comes out of a well-thumbed playbook that presents a daunting challenge to the incumbent board.
With Stokes’ Seven Group Holdings making an off-market bid of $6.50 a share – the Boral market price ahead of the offer – the nil-premium bid is designed to ensure Seven doesn’t end up spending $8 billion.
Indeed, Seven has made it clear its target shareholding is a far more modest 30 per cent or so which, given that it already holds 23.18 per cent of Boral, would entail an outlay of “only” about $540 million.
Seven Group’s Kerry Stokes is hoping to use the bid to execute an enlarged creep that would get him to 30 per cent of Boral.Credit:Philip Gostelow
In effect, having exhausted its current capacity to “creep” up the register by 3 per cent every six months, Seven is hoping to use the bid to execute an enlarged creep that would get it to 30 per cent of Boral, and probably effective control, in one go.
That’s Stokes’ traditional modus operandi. He used the same tactics to get control of the Seven Network in the early 1990s after it re-listed from the wreckage of Christopher Skase’s Qintex group, buying an initial substantial shareholding and then adding to it steadily until he had effective control.
He has, over the years, supplemented that core strategy by using the balance sheets of his target companies – Seven Network, West Australian Newspapers and Beach Energy are the obvious examples – to either sell in intra-group assets or to buy back their own capital and, through his non-participation in the buy-backs, increasing his control without paying any control premia in the process.
Now he wants to add Boral to what’s essentially an old-fashioned leveraged equity chain, with the Stokes family able to control a now-sprawling mix of media, industrial and energy businesses through a chain of shareholdings that range from just under to just over 50 per cent while the family own the majority (57 per cent) of the listed holding company, Seven Group.
It’s a structure made popular by the entrepreneurs of the 1980s – Robert Holmes a Court’s Bell Group was probably the best example from that period – because it provided them both control and leverage – structural and financial – to a far greater collection of assets than they could otherwise have financed.
Stokes doesn’t want to pay $8 billion for 100 per cent of Boral, although he will have had to arrange financing for that unlikely outcome because that’s what the Corporations Act requires. He doesn’t want to pay a control premium or dilute too materially the leverage available from effective control of an $8 billion company from a holding of less than 50 per cent. It would be out of character for Stokes to pursue a more conventional takeover.
Seven already has a big enough holding to ensure that no alternative bidder could succeed with a scheme of arrangement offer and, if it doesn’t have sufficient shares today to thwart an offer with a 50.1 per cent minimum acceptance condition, it almost certainly will in the not-too-distant future.
That creates a significant challenge for the Boral board which is already in a state of flux.
They are surely aware of Stokes’ history and what will unfold at Boral if they simply recommend shareholders reject the bid, as they have, and try to ignore it.
The Stokes family already has board representation. Ryan Stokes has recused himself while the bid is afoot – and will inevitably want to increase that if its offer achieves its objective. An attempt to install a second Seven nominee – Boral had announced the appointment of Ryan Stokes and Seven’s chief financial officer, Richard Richards to the board last year – was aborted after fierce shareholder protests.
Ryan Stokes has recused himself from the Boral board during the bid process.Credit:Louise Kennerley
If Seven gets to, or beyond, 30 per cent of Boral and is able to insist on another, or perhaps a couple of more board members, it will have effective control, particularly as the current Boral chair, Kathryn Fagg, has signalled her departure.
Boral has been undertaking a carefully-managed exit of its troubled US operations. Those operations are worth an estimated $3 billion or perhaps, given US President Joe Biden’s ambitious infrastructure spending plans, materially more.
If Stokes follows his playbook, as those proceeds flow in they will be used for a series of buy-backs in which Seven won’t participate, enabling it to cement its control without any control premia.
Given Seven’s existing position on the Boral register the likelihood of a competing offer is low.
The first thing the board should do is halt the $670 million buy-back it announced last month after the $1.3 billion sale of its share of the USG Boral joint venture.
There’s no need for the buy-back now that Seven has put a floor under the share price and it makes no sense to use Boral funds to increase Seven’s level of control and validate the absence of a control premium.
The second, given that Fagg appears committed to retiring, is to appoint a new chair and the third is to make a public statement. In the absence of a control premium and in the event Seven doesn’t end up with outright control, the board will be constructed and will act to protect and promote the interests of the majority of shareholders.
It should be said there are a lot of shareholders who have happily co-existed with Kerry Stokes in various vehicles over multiple decades.
Strengthening Boral’s governance structures as a pre-emptive move would be about improving the board’s negotiating position and improving the protections for non-Seven shareholders. Also, perhaps, making it more difficult for Seven to use Boral’s own funds to help it strengthen its control of the company from effective to absolute control if it succeeds in getting to its threshold target of 30 per cent with its current bid.
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Stephen is one of Australia’s most respected business journalists. He was most recently co-founder and associate editor of the Business Spectator website and an associate editor and senior columnist at The Australian.