Corporate vultures have a super-sense for smelling ripe prey. And their nostrils are flaring as they size up Australia’s $17 billion pallet maker Brambles. It reeks underperformance, has a vocally critical large shareholder, and exudes a whiff of strategic mistakes. Oh yeah – it also looks cheap.
While in its most recent quarterly performance report, Brambles, best known for its CHEP pallets, outlined some financial redemption strategies and moved to assure investors it will tread carefully to ensure an acceptable return will underpin its contract negotiations with giant retailer Costco, there is mistrust of the board and management’s ability to rehabilitate its financial performance.
Brambles confirmed early-stage takeover talks with CVC.Credit:Bloomberg
But the takeover approach to Brambles from a number of private equity players – one of which CVC was outed on Monday – will put the acid on the pallet pool player to convince investors that it has found the secret sauce to improve returns.
At this stage Brambles has only confirmed that the private equity vultures are circling but not the sort of money they are talking about.
That was enough to whet the appetite of the market and push the share price up 10 per cent on Monday anticipating a payday.
Judging from the company’s response to the market, it knows that it is under the pump to outline a better outcome for shareholders than just rolling over to the highest bidder. At the very least it wants to communicate that it has a viable alternative for shareholders than accepting an opportunistic bid.
Brambles’ critics don’t seem to think the plan is more complicated than using its large market share to pass on higher costs/prices to customers.
For Brambles the trust us plea will be a hard sell. Until Monday morning’s share price spike it had underperformed the index over the past year. In a share price sense Brambles is the definition of a long-term share price underperformer.
Strategies to improve returns for underperforming companies inevitably come with some catchy inspired label – in Brambles case it’s called the “Shaping our Future transformation plan” and it involves “unlocking the value for customers and shareholders”.
Brambles’ critics don’t seem to think the plan is more complicated than using its large market share to pass on higher costs/prices to customers, finding a way to better keep track of the pallets in its pool (instead of losing them) and making sure any deals it does with big customers such as Costco contain terms that are financially favourable to Brambles.
The company talks about investing in digital technology to better track and optimise pallet movements – a strategy that has unassailable logic.
Mistakes aside, Brambles is a valuable company. It is the world’s largest pallet company – particularly in the domain of fast-moving consumer goods.
The challenge facing its chairman, John Mullen, is to ensure that the under-rewarded shareholders receive an offer that reflects its potential.Credit:Dominic Lorrimer
It has a global network of pallets and has some of the characteristics of an infrastructure company. It employs 12,000 people, owns 355 million pallets crates and containers and operates in 60 countries.
As a fixer-upper it’s a large important company that holds plenty of appeal for private equity. Brambles presents a great gearing up opportunity for any private equity company owner.
The challenge facing its chairman, John Mullen, is to ensure that the under-rewarded shareholders receive an offer that reflects its potential.
Brambles also dangled to investors the possibility of “other strategic options… to maximise shareholder value”. Without providing any hint as to what this might be, the statement is tantalising but fairly meaningless.
Having activist shareholders such as Perpetual in the mix applies an additional layer of pressure.
It is in shareholders’ interest to have Brambles in play and to actively encourage potential suitors to play their cards. They will be leading the charge to lean on the Brambles board into allowing suitors to conduct due diligence.
From Perpetual’s perspective an outcome that results in it cashing in on an underperforming investment.
Second prize for shareholders will be to activate the Brambles’ board wake-up alarm to let it know that doing nothing is not an option.
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