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SPECULATION is mounting that a private equity consortium is considering a $22 billion bid for Brambles, the world's biggest pallet company, after Toll Holdings and its ports-rail spin-off Asciano revealed they had built a stake in the outfit.
Asciano chief executive Mark Rowsthorn said: "I'm sure private equity firms are running the ruler on Brambles and others. I don't think they needed us to demonstrate the company is undervalued."
Mr Rowsthorn said Asciano had not bought any more shares since Brambles said on Tuesday that Asciano had taken a 1.8 per cent stake, and Asciano's former parent Toll had snared 0.5 per cent over a six-week period.
Shares in Brambles jumped 1.1 per cent yesterday to $12.73, putting it on a market capitalisation of almost $18 billion. The stock rose almost 12 per cent the day before.
Bell Potter strategy director Peter Quinton said: "Brambles is definitely in play. You can't rule out private equity having a look at it, given that even after what has happened with the interest spread of speculative debt, the after-tax financing costs for speculative debt is still below equity yields."
Mr Quinton said Brambles was an ideal private equity candidate because it had strong cashflow and an extraordinarily strong balance sheet, while some operations still had room for improvement.
Some say a joint bid by Toll and Asciano is coming, but undertakings to the Australian Competition and Consumer Commission (ACCC) as part of the Toll-Asciano restructure make this impossible.
If Toll decides to lob a bid for Brambles, it could encounter problems with the ACCC because Toll is one of the biggest customers of Chep, a pallet hirer that is a wholly owned subsidiary of Brambles, and owning pallets would integrate customers further into the Toll supply chain.
Goldman Sachs JB Were suggests Asciano could justify an offer of up to $15 a share. This would involve a high equity component of about 45 per cent, spinning out Recall and continuing to partly fund distributions by debt, with dividends per share growth accelerating to 15 per cent from years three to four.
Toll and Asciano both shocked the market on Tuesday when it was revealed each had been building small stakes in Brambles over the past few weeks, just two months after Asciano was spun off from Toll.
The rise in the Brambles share price over the past few days must be welcome to its new chief executive, Mike Ihlein, who took the top job on July 1. The share price has fallen 11 per cent since November, when it completed the sale of its waste collection and industrial services unit and delisted from the London Stock Exchange.
Citi bought the shares on behalf on Toll. Interestingly, an analyst's report from Citi touts the potential synergies of a Toll-Brambles merger.
"The potential acquisition of Brambles highlights key opportunities for Toll," it reads.
It also outlines potential risks: "The financial size of the transaction, short-term synergy challenges, scale of Brambles operations, and Brambles' possible response -- increased gearing."
By Adele Ferguson
August 10, 2007 06:00am
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