Archive | Fletcher Building

Fletcher Building exits Sims recycling joint venture

Fletcher Building Ltd has reached agreement to sell its 50% stake in the Sims Pacific Metals Ltd recycling joint venture to Sims Metal Management Ltd of Australia for $42 million.

The purchase price is subject to a working capital adjustment which will be finalised post-acquisition. Based on current estimates, Fletcher Building expects total proceeds of the divestment to be between $55-60 million.

Fletcher Building subsidiary Fletcher Steel Ltd & Sims Metals Management established Sims Pacific Metals in 1992 as a 50/50 joint venture.

It’s New Zealand’s largest metal recycling company, operating 9 sites around the country converting scrap metal products into recyclable materials.

In line with Fletcher Building’s strategy to divest non-core businesses, the company decided to exit the joint venture and focus its steel division operations on its manufacturing & distribution activities.

When Carter Holt Harvey Ltd bought Elders Resources NZFP Ltd from Australian mining company North Ltd in 1989, it divested Elders’ non-forestry businesses, including Sims. Sims relisted on the ASX at the end of 1991, shortly before the deal was struck with Carter competitor Fletcher, which had its own smaller subsidiary, Pacific Steel Ltd.

Fletcher sold Pacific Steel in 2015 to BlueScope Steel Ltd, formerly part of the BHP group.

Attribution: Fletcher Building release, Sims Metals, Pacific Steel.

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Hassall to chair Fletcher Building, 4 new directors named

Fletcher Building Ltd will have a new chair & 4 new directors on 1 September. 2 directors will retire.

Sir Ralph Norris will step down as chair, replaced by Bruce Hassall (pictured at right), who was appointed as an independent director on 1 March 2017.

The 4 new directors, all independent, are Barbara Chapman, Robert McDonald, Doug McKay & Cathy Quinn. The company also intends to appoint an extra Australian director.

2 directors will retire – Alan Jackson by rotation at the annual meeting, after 9 years, and Cecilia Tarrant on 1 September, after 7 years, to allow an additional director to be appointed to the board as it oversees the implementation of the new Fletcher Building strategy.

Sir Ralph said the appointments would strengthen the board’s expertise & diversity.

Expertise is an important factor, because it was the lack of board expertise in the construction sector that was most notable in the collapse of the company’s vertical construction performance. The company is exiting that part of its business – 4 projects left to complete.

Sir Ralph said today: “While our original intention was to seek a director with construction experience, with our appointment [as chief executive] of Ross Taylor, who has considerable expertise in this area, our decision to exit the vertical construction sector and a new strategy in place, we believe the appointments we have made will best support the company’s new strategic direction.”

Mr Hassall has extensive experience across both public & private sectors. He was chief executive & senior partner at accountancy firm PricewaterhouseCoopers NZ. He will relinquish his role as chair of the audit & risk committee.

The new directors:

Barbara Chapman.

Barbara Chapman, BCom: Ms Chapman retired after 7 years as managing director & chief executive of ASB Bank Ltd, and previously as group executive human resources & group services for the Commonwealth Bank of Australia. Barbara recently joined the boards of Genesis Energy Ltd & NZME Ltd as an independent director.

She began her career with the Commonwealth Bank Group in 1994 and has held senior executive roles responsible for marketing, communications, human resources, retail banking & executive leadership in New Zealand & Australia.

She has also chaired Oxfam NZ and been a director of Oxfam International, was an inaugural trustee of the NZ Equal Employment Opportunities Trust and chaired it for several years and is an inaugural member of the “25 Percent Group”, which aims to increase diversity at senior management levels & within New Zealand boardrooms.

Rob McDonald.

Rob McDonald, BCom, FCA: Mr McDonald retired as Air NZ Ltd’s chief financial officer at the end of 2017 after 24 years with the airline. He was appointed group financial planning manager in 1993, group treasurer in 1995 and chief financial officer in 2004.

He’s an independent director of Contact Energy Ltd and will take over the chair there on 1 September. He’s a director of Chartered Accountants of Australia & NZ and will chair Fletcher Building’s audit & risk committee.

Doug McKay.

Doug McKay, BA, ONZM, CMinstD: Mr McKay was the first chief executive of the new Auckland Council in 2010, on a fixed term until 2012. Before that, he had an extensive background in leading large organisations in both New Zealand & Australia, including senior roles at Carter Holt Harvey Ltd, Lion Nathan Ltd & Goodman Fielder Ltd, and as chief executive at Sealord and chief executive & executive chairman of Independent Liquor (NZ) Ltd. He chairs the Bank of NZ & Eden Park Trust and is an independent director of

Cathy Quinn.

Genesis Energy Ltd, IAG NZ Ltd & the National Australia Bank.

Cathy Quinn, LLB, ONZM: Ms Quinn is a commercial & corporate lawyer. She leads the mergers & acquisitions and private equity teams and the China practice at Minter Ellison Rudd Watts, and has chaired the firm for 8 years. She’s a director of Tourism Holdings Ltd and a board member of the NZ Treasury & the NZ China Council.

Progress pleases Norris

Sir Ralph Norris presenting the annual result last August.

Commenting on the appointments, Sir Ralph Norris said: “When I announced that I would step down as chairman in February I committed to first completing the chief executive transition & board refresh I had commenced, and I am pleased with the progress that has been made.

“Our chief executive, Ross Taylor, is now firmly established in the role and has led the development of a focused strategy that aims to deliver long-term growth for shareholders. Our balance sheet has been strengthened following a successful capital raising, and the company is on track to deliver 2018 financial guidance.

“Bruce Hassall will bring strong & steady leadership as Fletcher Building’s new chairman, and will complete the board refresh with the appointment of an Australian director in the coming months.

“Our 4 new independent directors are high calibre individuals who bring a mix of commercial, operational & governance expertise, which will greatly enhance the experience & diversity of the board.

Attribution: Company release.

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Australia the next big focus for Fletcher, offsite construction an innovation example

Fletcher Building Ltd chief executive Ross Taylor said in a presentation in Sydney yesterday the group intended to grow its Australian business over the next 5 years to be bigger than its New Zealand construction & building products business.

To do so, he expects to take a leaf out of the New Zealand business’s success, the vertical integration & intercompany trading which make up 11% of its business here but only 3% in Australia.

Fletcher Building chief executive Ross Taylor.

Mr Taylor & chief financial officer Bevan McKenzie gave 2 presentations, to media and then to analysts, on the company’s 5-year strategy.

At the end of the first presentation, Mr Taylor said: “We’d expect, 5 years out, Australia to be bigger than New Zealand. You’ve got to say that’s the vision for Fletcher Building. That puts a marker here, that we want to be bigger in Australia.”

In a pre-presentation story on the documents yesterday, I characterised the strategy as spring-cleaning. After one streamed presentation and going through the similar documentation presented to analysts, that remains a reasonable view of it.

Some of the “strategy” amounts to exhortation to do better, as in this from Mr Taylor: “25% of our businesses have a culture of innovation. We need to drive this to 100% over the next couple of years.”

The company has already announced parts to be sold – Formica and the Roof Tile Group.

Fletcher has stopped seeking new work for its commercial vertical construction business, the exceptionally troubled part of the Building + Interiors division, and will continue to wind it down.

That leaves the strategy focus on getting the remaining New Zealand businesses to perform better, and lifting output in Australia. The starting point is the departure of about 90 staff – either gone or leaving – and the repositioning of the multi-business structure, with new appointments, titles & selection of business segments to command.

From the outside, what do you see in Fletcher Building? If it’s not in your segment of the market but might decide to enter it, you need to be wary of possible outcomes. In New Zealand construction-related business beyond the troubled commercial construction segment, Fletcher is not looking at downsizing.

At one point, Mr Taylor said Fletcher would assess “everything we do through a customer lens” [versus the control temperament which has driven the Fletcher business model for decades]. But mostly the presentations were about clarifying business portfolios and driving the businesses within them harder.

How the strategy looks

Below are excerpts from the presentations, with some explanatory comment.

Any portfolio decisions need to position us to take advantage of key macro trends:

Product innovation:

  • Green & efficient buildings: regulation & changing consumer preferences drive innovation in energy efficiency
  • Moving into an era of advanced functional materials & more resilient systems

Service & channel innovation:

  • Personalised service expectations are growing. Customers interact with a brand (not a channel) and expect the same experience no matter what channel
  • Incumbents & new low-cost entrants offering digital services & online purchasing to end consumers

Labour productivity:

  • Pre-assembled structures reduce the need for onsite labour and speed up construction times
  • Value shift in favour of larger manufacturing entities able to invest in offsite production facilities

Global supply chains:

  • Low cost country (LCC) sourcing for inputs continues to present large cost reduction opportunities
  • Globalisation of competition from LCC producers & Western players threaten share & margin erosion

Continuing to manage multiple platforms across multiple geographies from a capital & capability perspective was likely to be challenging. Therefore we have decided to focus the business.

Our starting point: a portfolio made complex through lack of a clear strategy.

With Fletcher Building at only 15% of the overall NZ market & 1% of Australia in residential, non-residential and infrastructure & other, there are ample opportunities to grow share and pursue new “adjacencies”.

Adjacencies? What Mr Taylor presented was a chart (below) showing market segments where Fletcher Building has a presence, and those where it doesn’t – and therefore might expand.

“Our first priority will be to refocus on our core, and actively defend and grow NZ Building Products & Distribution.

“In New Zealand, we will continue to leverage businesses that are complementary to our core and strong performers in their own right. Golden Bay Cement-Winstone is a strong performer. The core adds value by generating pull-through. Residential & Development is a strong performer that adds value to the core by generating pull-through and driving innovation (eg, panelisation). In Construction, we have strong market positions and generate pull-through, but we have to get it performing.”

The decision to exit market sectors

“Finally, we had a choice to make. We had 2 legitimate plays relative to the core, but we couldn’t do both given constraints around capital & capability.”

Option 1: Turn around & grow Australia as a natural extension to the Fletcher Building core
Option 2: Drive Formica to full potential with focus & capital
The decision: Australia is the preferred growth platform.

Intercompany sales

An important factor was a comparison between the opportunity to drive sales between Fletcher companies. At Formica the opportunity was minimal, whereas in Australia it was high. Compared to intercompany sales in New Zealand – $660 million, 11% of total sales of $6.2 billion – Australian intercompany sales last year were worth only $80 million, or 3% of $3.1 billion total sales.

From there, the vision, and that is “to be the undisputed leader in NZ & Australian building solutions – with Products & Distribution at our core”. Under that heading, Mr Taylor pointed to “where to play” and then to “how to win”.

Where to play:

Refocus on the core:

  • Defend & grow NZ Building Products & Distribution
  • Leverage complementary positions in Concrete & Residential

Stabilise Construction:

  • Close out B+I within provisions
  • Grow infrastructure & roading businesses

Strengthen Australia:

  • Achieve a successful turnaround
  • Replicate select NZ positions in Australia

Exit non-core businesses:

  • Divest Formica & Roof Tile Group

From there, Mr Taylor said the next step was “how to win”, which came with 5 bullet points:

  • A simpler & leaner, decentralised operating model
  • Innovating to achieve continuous improvement and take advantage of key macro trends
  • Disciplined performance improvements in safety, sustainability, procurement & operations
  • Growth capex focused on strategically important, high returning business units
  • Adding infills & adjacencies.

He said Fletcher Building saw 3 broad stages to advance those intents over the next 3 years (June balance dates):

2019: stabilising – turnaround or exit
2020: solid performance
2021: growth

Cutting central control

One key element of these changes is to reduce “an overweight central overhead” – that “overhead” will be moved closer to the front line for an annualised cost saving estimated at $30 million, expressed this way: “Moving front line-focused activity back to the divisions & business units to better serve our customers, control risks & grab opportunities”.

Mr Taylor said: “25% of our businesses have a culture of innovation. We need to drive this to 100% over the next couple of years.”

Existing examples of innovation include:

  • Laminate exterior cladding
  • Mobile PVC manufacturing
  • Gypsum-based rigid air barriers
  • Benchtop, roofing & façade integrated photovoltaics
  • Lightweight flooring systems
  • Self-cleaning steel roof panels
  • 3D concrete printing

Offsite construction impetus

“Panelisation” – more factory completion of buildings or building components – fell under the heading of labour productivity rather than innovation. Mr Taylor said the company had completed 2 successful prototypes, had tested modularised vertical construction and was looking for a factory site in Auckland. He expected it would cost $15-20 million to build.

“We’ve trialled panels on a number of houses. Of the 1000 houses we’re doing, we’ve got 300-350 houses/year we can panel – you can’t do it on every house. We’re testing it on our own houses. Over the next 12 months it will be operating fully.

“You get savings when you get scale of throughput and you drop it [the house construction timeframe] from 22 weeks to 9.”

The big projects

On the group’s lossmaking issues with vertical, large commercial construction, chief financial officer Bevan McKenzie said confidentiality agreements meant it wasn’t for Fletcher to make announcements. However, he said the Building + Interiors division had completed 7 of 16 projects it had underway when the company revealed the division’s exponential lossmaking last year, 5 more would be completed this year and 4 would be completed in 2019, including the major pair in Auckland, SkyCity Entertainment Ltd’s NZ International Convention Centre and Precinct Properties NZ Ltd’s Commercial Bay redevelopment of the old Downtown Shopping Centre.

21 June 2018, Fletcher Building strategy presentation slides

Earlier stories:
21 June 2018: Fletcher Building strategy amounts to a spring clean – board announcement tomorrow
20 April 2018: Institutional bookbuild puts $1.35 premium on Fletcher shares
18 April 2018: Big Fletcher fundraiser plus divestments intended to stabilise construction’s fallen giant
4 April 2018: Lenders give Fletcher Building 2-month waiver extension
2 March 2018: Fletcher gets US waiver, still negotiating funding terms
21 February 2018: Fletcher half-year loss $322 million
14 February 2018: Another $486 million of losses for Fletcher Building, and Norris resigns
8 February 2018: Fletcher Building warns of worse to come
19 January 2018: Regulator clears Fletcher Building of continuous disclosure breach
27 October 2017: Sheppard turns Fletcher meeting into “absolution or exorcism” exercise
25 October 2017: Fletcher issues guidance, names new chief executive
21 September 2017: 
A year on, Fletcher board still has ‘construction nous vacancy’ pencilled in
17 August 2017: 
‘Fessed up, time to move on, says an unconvincing Fletcher boss
21 July 2017: 
Fletcher Building takes axe again to construction earnings, Adamson ousted
20 March 2017: 
Fletcher Building cuts earnings guidance by $110 million
19 March 2017: 
Fletcher Building to explain construction loss Monday morning
22 February 2017: 
Fletcher Building net up 2% after site closures

Attribution: Company presentation, live stream.

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Fletcher Building strategy amounts to a spring clean – board announcement tomorrow

Fletcher Building Ltd confirmed its revised strategy today, but will make another announcement about board changes tomorrow.

The key part of today’s strategy announcement is a rejigging of senior executive jobs, including more appointments to the top tier, the executive team.

The company has already said it will sell 2 businesses, Formica & Roof Tile Group. It’s appointed Macquarie Capital Ltd as advisor on selling Formica.

The “strategy” amounts to a spring clean for an outfit that likes to gather businesses as it goes along, then finds it’s a structural mess.

The strategy statement: Fletcher Building confirms diversity out, simpler & leaner in with focus on NZ, Australia

Fletcher Building chief executive Ross Taylor.

Fletcher Building Ltd chief executive Ross Taylor said today the company had confirmed its strategy, “which is designed to improve financial & operating performance by focusing its portfolio on the New Zealand & Australian markets and introducing a simpler & leaner operating model”.

Mr Taylor said: “Fletcher Building is currently one of the most diversified building materials companies in the world, with operations spanning multiple geographies, sectors, value chains & product lines.

“As we announced to the market in April, we have made the decision to focus our portfolio by divesting our Formica & Roof Tile Group businesses and focusing our capital & capability behind the New Zealand & Australian markets.

“While we don’t expect these markets to experience the same levels of growth they have seen in recent times, we do expect them to remain stable, and with only 15% share of the New Zealand market & 1% in Australia, there is plenty of opportunity to deliver more from our existing operations.

“In New Zealand our focus will be on growing our core operations in building products & distribution, leveraging our strong positions in the concrete value chain & residential construction, and returning construction to sound operating performance by closing out remaining Building + Interiors (B+I) projects within provisions, and profitably growing our infrastructure & roading businesses.

“We will leverage global trends in product, service & channel innovation to deliver more value for our customers right across our portfolio. Taking one example, with our planned investment in a new panelisation plant in Auckland, we will aim to deliver homes more efficiently for a supply-constrained market.

“In Australia we are targeting a significant improvement in the operating & financial performance of our existing businesses and, in time, we will seek to expand our portfolio as we have done in New Zealand through targeted acquisitions.

“We see the strategy being delivered over 3 broad stages. In the 2019 financial year (to June 2019) we will focus on stabilising & turning around our existing businesses, while divesting Formica & Roof Tile Group. By the 2020 financial year we should be well positioned to deliver solid performance across the portfolio, and from the 2021 financial year onwards we want to be achieving strong revenue & earnings growth year on year.

“With successful implementation of the strategy, we aim to deliver above-market revenue growth & improved operating margins over the medium term.”

Mr Taylor said that, to enable the new strategy, Fletcher Building would:

  • target investment behind its most strategically important & highest returning businesses
  • increase its focus on innovation
  • pursue improvements in procurement, operational efficiency & working capital, and
  • introduce a simpler & leaner decentralised operating model.

The company will introduce the new operating model on 1 July and aims to:

  • reduce overheads across the group by $30 million/year
  • empower businesses at the front line, and
  • deploy a new divisional structure that will align businesses to the new strategy.

The changes to structure have resulted in a number of new appointments to the Fletcher Building executive team , which will also be effective from 1 July:

  • Dean Fradgley, distribution chief executive, has been appointed to the newly created role of chief executive Australia. All Australian businesses will now sit within this one division
  • Bruce McEwen, PlaceMakers general manager, will join the executive team as chief executive of distribution NZ, which includes PlaceMakers & Mico
  • Ian Jones, GBC Winstone general manager, will join the executive team as chief executive of the newly created Concrete Division, which includes Golden Bay Cement, Winstone Aggregates & Firth
  • Hamish Mcbeath, Fletcher Steel general manager, will join the executive team as chief executive of the newly created Steel Division, which includes all the company’s New Zealand steel businesses
  • David Thomas will continue as interim chief executive of the revised Building Products Division, while a permanent replacement is recruited
  • Steve Evans will continue as chief executive of the Residential Division
  • Michele Kernahan will continue as chief executive of the Construction Division
  • Claire Carroll has been permanently appointed as the chief people & communications officer
  • All other corporate function executive roles remain unchanged.

There is no change to the estimated 2018 financial year ebit (earnings before interest & tax) for the group (excluding B+I & significant items) of $680-720 million and no change to the estimated B+I ebit loss of $660 million announced on 14 February.

Mr Taylor said the 2018 result was likely to include a number of significant items, including:

  • restructuring charges associated with the implementation of the new operating model (a charge of between $85-95 million)
  • a gain on the sale of Fletcher Building’s 20% stake in the Dongwha processing plant through Laminex NZ (a gain of about $12 million), and
  • a likely impairment of the carrying values of the Rocla & Roof Tile Group businesses.

Fletcher Building will announce its financial results for the year ending next week (30 June) on Wednesday 22 August.

Attribution: Company release.

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Fletcher Building to present strategy live online from Sydney on Thursday

Fletcher Building Ltd will present its strategy to investors & analysts in Sydney on Thursday at 11am NZ time (9am Sydney time).

The webcast will be screened live online and will be available later on replay on the company website.

Head of communications Leela Gantman said today investors would be able to ask questions live via the webcast facility: “While every endeavour will be made to answer all the questions that are submitted, this may not be possible due to time constraints, and is at the discretion of Fletcher Building management.”

The company will release its annual result on Wednesday 22 August.

Live webcast

Attribution: Company release.

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Updated: Retail bookbuild shortfall for Fletcher Building, margin increase on US debt

Published 16 May 2018, and retail bookbuild update at 9am 16 May 2018:
Fletcher Building said in an update on the retail bookbuild this morning the retail offer raised gross proceeds of $229.5 million from the issue of 47.8 million new shares at an issue price of $4.80/share.

The clearing price under the retail bookbuild was $6.45/share, representing a premium of $1.65/share over the entitlement offer price of $4.80. Eligible retail shareholders who elected not to take up their entitlements and ineligible retail shareholders will receive $1.65 for each entitlement not taken up by them.

Fletcher Building Ltd retail shareholders took up only 58% of their entitlement in the company’s $750 million share offer, and the $97 million balance was taken to a shortfall bookbuild overnight.

The fundraising dropped from $750 million to an expectation of about $725 million, but this morning’s announcement takes the total raised to about $745 million.

In separate negotiations with US lenders, Fletcher Building has agreed to a 1.25% margin increase through to 30 June 2019, or earlier if certain conditions are met, and has also agreed to cut its total available facilities by $300 million.

When the offer opened on 17 April, the clearing price under the institutional shortfall bookbuild of 2.2 million entitlements was $6.15/share, a $1.35 premium over the entitlement offer price of $4.80, and a premium over the theoretical ex-rights price of $6.

Gross proceeds (excluding the premium) raised in the institutional offer increased from the expected $500 million to $515 million.

The retail 1:4.46 pro-rata accelerated entitlement offer raised a gross $132.3 million before the shortfall bookbuild of 20.2 million new shares.

Bank syndicate & USPP noteholder update

In negotiations related to its fundraising, Fletcher Building said it had agreed a permanent solution to the breaches of financial covenants across its funding arrangements arising as a result of the previously announced losses in its Building & Interiors business (B&I).

The company said the terms of the permanent solution agreed with its syndicate bank lenders & USPP (US private placement) noteholders were consistent with those targeted by the company, as announced on 17 April. Key terms agreed under the 2 agreements are:

  • Previously announced B&I losses to be excluded from covenant calculations
  • Revised covenants: senior leverage ratio <3.25x; senior interest cover >3.00x; total interest cover >2.00x:
    • Until the earlier of 30 June 2019 or the date on which the senior leverage ratio (including the previously announced B&I losses) is less than 1.75x for 3 consecutive months:
      • additional margin payable of 1.25%, and
      • proceeds from disposals of assets above a threshold must be first offered for repayment of senior debt.

For the syndicates agreement, Fletcher Building said it had elected to reduce its total available facilities from $1.27 billion to $925 million, with no change to the maturity of these remaining facilities.

For the USPP, there will be no prepayment of any notes, all existing facilities have been maintained and there is no change to the maturity of the facilities. There is no change to underlying margin payable on the USPP notes, other than the 1.25% additional margin outlined above, which will cease to be payable no later than 30 June 2019.

Fletcher Building said it would no longer need the $500 million standby facility it established as a contingent facility in support of the entitlement offer and it will be cancelled with effect from this Friday, 18 May.

The company will apply net proceeds from the equity raise of about $725 million to the repayment of senior debt under the syndicated facilities agreement. Following this repayment and based on the company’s 31 March 2018 financial position, Fletcher Building’s gross borrowings will be $1.787 billion and total available debt facilities will be $2.712 billion.

Formal documentation with the senior bank lenders & USPP noteholders is to take effect this Friday, 18 May, contemporaneously with settlement of the retail entitlement offer.

Earlier stories:
20 April 2018: Institutional bookbuild puts $1.35 premium on Fletcher shares
18 April 2018: Big Fletcher fundraiser plus divestments intended to stabilise construction’s fallen giant
4 April 2018: Lenders give Fletcher Building 2-month waiver extension
2 March 2018: Fletcher gets US waiver, still negotiating funding terms
21 February 2018: Fletcher half-year loss $322 million
14 February 2018: Another $486 million of losses for Fletcher Building, and Norris resigns

Attribution: Company release.

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Institutional bookbuild puts $1.35 premium on Fletcher shares

Fletcher Building Ltd shares resumed trading today after the institutional shortfall bookbuild of the company’s $750 million fully underwritten pro rata accelerated 1:4.46 entitlement offer of new shares.

The clearing price under the shortfall bookbuild of 2.2 million entitlements was $6.15/share, a $1.35 premium over the entitlement offer price of $4.80, and a premium over the theoretical ex-rights price of $6.

Following ongoing shareholder reconciliations, the gross proceeds (excluding the premium) raised in the institutional entitlement offer & institutional bookbuild has increased from the expected $500 million to $515 million.

The retail entitlement offer, at the same offer price & offer ratio as the institutional entitlement offer, will open on Monday 23 April and close on Friday 11 May.

Earlier stories:
18 April 2018: Big Fletcher fundraiser plus divestments intended to stabilise construction’s fallen giant
4 April 2018: Lenders give Fletcher Building 2-month waiver extension

Fletcher links:
News: 1:4.46 entitlement offer
Offer document

NZX documents:
Investor presentation
Offer document
NZX appendix 7
ASX appendix 3B

Attribution: Company releases.

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Big Fletcher fundraiser plus divestments intended to stabilise construction’s fallen giant

Fletcher Building Ltd announced a fully underwritten $750 million equity-raising yesterday.

It will open next Monday, 23 April, and close on Friday 11 May.

The offer price of $4.80/share represents a 23.4% discount to the closing price on Monday and a 20.0% discount to the theoretical ex-rights price of $6. The underwriter is Macquarie Securities (NZ) Ltd.

As a rescue or stabilisation issue, those are hefty discounts. But if you compare the $4.80 price with Fletcher Building before its troubles were unveiled, it’s a steal (assuming it rights itself): $4.80 is a 56% discount to the opening price in January 2017, $10.80.

The company’s shares – which have taken a drubbing since the first revelations of extraordinary Building + Interiors division losses way back in March 2017 – gained 50c to $6.34 at the end of last week on news that Australian company Wesfarmers may have taken a stake in Fletcher (which turned out to be held by an enterprising Australian investor). The price was back at $6.27 at the close yesterday.

The shares were up at $11.02 in September 2016 but declined steeply in February 2017 as rumours came out of construction losses, were at $8.64 at the start of May last year and $7.56 at the end of that month, and were at $5.78 on 4 April, immediately after Easter.

In a long list of points about the fundraiser, the troubled building sector company said it had a new $500 million standby bank facility and could redeem all the US private placement (USPP) notes if required.

As predecessor Fletcher Challenge did after the 1987 sharemarket & property sector crashes, Fletcher Building also noted its intention to pull back from its internationally expansive tendencies. In the 1980s, Fletcher Challenge had interests in 3 broad sectors – construction, forestry & energy – but started the pullback by withdrawing from overseas construction, and continued in the 1990s by exiting its North American forest interests and separating the pulp & paper sector, and also exiting energy.

In this round, it will start the divestment process for its Formica and Roof Tile Group businesses.

Key principles

Chief executive Ross Taylor & chief financial officer Bevan McKenzie said in the company’s online presentation yesterday: “While work remains to be done to complete the strategic review that the company has been undertaking, the board has approved the following key principles:

  • A focus of the group’s activities on New Zealand & Australia
  • In New Zealand: – actively defending & growing the Building Products & Distribution core – vertically integrating around this core where this provides the group with: competitive advantage, stronger growth & better outcomes for customers. As such, the group’s positions in the Concrete value chain and in Residential Development remain an essential part of its overall NZ strategy; – stabilising the Construction business and returning it to sound operating performance
  • In Australia: improving the performance of the Australian businesses through greater focus, synergies & investment, such that the company can maintain & grow leading positions in the Building Products & Distribution core
  • This focus on New Zealand & Australia means the company will undertake divestment processes for its Formica & Roof Tile Group businesses.

What you can see, and where

There are some peculiarities to the announcement. You can open the offer document directly on the NZX website, but on Fletcher Building’s website you have to go through a process of confirming you’re not in the US and won’t release the document over there.

The company’s investor presentation can be opened directly on the NZX website, but I can’t find it on the company website. It doesn’t count as news yet on the company website – last entry in that section was chair Sir Ralph Norris’s letter to shareholders on 28 February.

In a release headed Fletcher Building Ltd moves to strengthen balance sheet and focus portfolio, the company said it was “undertaking actions to strengthen its balance sheet and better enable it to execute its immediate & longer-term strategic objectives”.

Key points:

  • Raising $750 million through a fully underwritten pro rata 1:4.46 accelerated entitlement offer at $4.80/share
  • Institutional & retail entitlement offers with bookbuilds for any shortfall
  • The company will use proceeds from the offer to repay debt
  • Commitments obtained from the required majority of lenders to a permanent solution of the current breach under the syndicated facility agreement
  • New standby banking facility of $500 million established with ANZ, MUFG Bank (Mitsubishi UFJ Trust & Banking Corp) & Westpac
  • Discussions with the USPP noteholders are ongoing and Fletcher Building’s objective & expectation are that it will achieve a mutually acceptable outcome
  • While not expected to be needed, proceeds from the offer & standby facility are sufficient to redeem all USPP notes and pay associated costs if required
  • Key principles of group strategy approved by the board: focus activities on New Zealand & Australia, with divestment processes to be undertaken for the Formica & Roof Tile Group businesses
  • No change to estimated 2018 financial year group ebit (excluding Building + Interiors & significant items) of $680-720 million and estimated loss for B+I of $660 million.

Company expects to cut leverage

Mr Taylor said the company expected normalised leverage (excluding the Building + Interiors business) to reduce to 1.6x, at the lower end of its revised target range of 1.5-2.5x.

He said discussions with the USPP noteholders were ongoing, and Fletcher Building’s “objective & expectation is that it will achieve a mutually acceptable outcome by 31 May”. While the company didn’t expect it would need the standby facility, it had been put in place to ensure that, together with the net equity proceeds of the offer, the company would be able to redeem all USPP notes and pay associated costs if required.

Mr Taylor said the company’s strategic review was progressing well and he expected to announce it in full in June.

Trading update discloses no margin on highway job

In a group trading update, Mr Taylor warned that Fletcher Building expected to get no profit margin from one infrastructure project, The Puhoi-Warkworth (P2W) project – the road of national significance extending the motorway-style State Highway 1 closer to Northland – where Fletcher Construction is in a 50:50 joint venture with Spanish company Acciona SA.

“The reset of the Construction business continues and regular internally led project reviews are now established across the business.

“With respect to the B+I business, there is no change to the project provisions announced in the 14 February trading update, and no change to the estimated FY18 B+I ebit loss of $660 million.”

Of the 16 key projects identified in that trading update:

  • 5 projects now complete, including the Justice Precinct in Christchurch – all completed within 14 February provisions
  • 7 projects targeting completion by end of calendar 2018 – all currently operating within 14 February provisions
  • 4 remaining projects including NZ International Convention Centre & Commercial Bay – all currently operating within 14 February provisions.

The announcement is on the Fletcher Building website, but you won’t find it, or the presentation sent to the NZX, instantly. The company hasn’t updated its announcements on the website since chair Sir Ralph Norris’s letter to shareholders on 28 February.

Fletcher links:
News: 1:4.46 entitlement offer
Offer document

NZX documents:
Investor presentation
Offer document
NZX appendix 7
ASX appendix 3B

Attribution: Company release, presentation, offer document.

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Lenders give Fletcher Building 2-month waiver extension

Fletcher Building Ltd said last Thursday it had obtained a 2-month extension to the waivers of the breach of financial covenants under its US private placement & bank syndicate funding arrangements.

The company breached its covenants when it provided for expected losses incurred by its Building & Interiors (B+I) business, as announced on 14 February & included in the its financial statements for the December half-year.

The breaches were initially waived until 31 March and have now been extended until 31 May with both the private placement & bank syndicate lenders. Fletcher Building said that, as with the initial waiver, if new terms are not agreed by 31 May a further extension would need to be agreed with the lenders.

The company said in a statement it had made progress in discussions with the lenders on amendments to the funding arrangements.

Under the terms of the new waiver, the syndicate lenders have now provided access to the company’s full syndicate funding facilities.

Fletcher Building confirmed that it hadn’t changed its estimate of 2018 group earnings before income tax & significant items, excluding B+I, of $680-720 million, and no change to the estimated ebit loss for the B+I business of $660 million.

Earlier stories:
2 March 2018: Fletcher gets US waiver, still negotiating funding terms
21 February 2018: Fletcher half-year loss $322 million
14 February 2018: Another $486 million of losses for Fletcher Building, and Norris resigns

Attribution: Company release.

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Fletcher gets US waiver, still negotiating funding terms

Fletcher Building said yesterday it had received a waiver of the breach of covenants under its US private placement (USPP) funding arrangements, subject to conditions, which the company expected to satisfy over the next few days.

The breach of covenants occurred as a result of the provision for losses incurred by Fletcher Building’s Building + Interiors business, which were announced on 14 February and included in the company’s financial statements for the December half-year.

Fletcher Building’s bank syndicate gave the company an equivalent waiver on 13 February.

The company said in a release yesterday it was now discussing amendments to the terms of its funding arrangements with both its bank syndicate & USPP noteholders.

If the company doesn’t agree on the amendments by 31 March, it will need to seek an extension of the waiver from the bank syndicate & the USPP noteholders.

Attribution: Company release.

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