Fletcher Building paid US$700 million to buy Formica Corp from private equity owners Cerberus Capital Management and Oaktree Capital Management in 2007.
It may be a good time to sell a business that sits outside its core operations, Morningstar says.
In a note released after Fletcher announced wider losses in its construction business and breaches of lending covenants on Wednesday, the research firm said it anticipates “the divestiture of assets, especially those earning low returns with no synergies across the rest of the business”.
“These should be the focus as long as they can be realised at attractive prices,” Morningstar analysts said. “In our opinion, Formica fits the bill on both criteria.”
In detailing further provisions at the Building + Interiors unit of the construction division, chief executive Ross Taylor said that he expected to unveil a revamped business strategy for Fletcher by June, including “what bits, if any, we want to trim”.
Former Fletcher CEO Jonathan Ling bought Formica in 2007, adding to the existing Laminex business in Australasia, with the aim of creating “a truly global laminates platform” and further diversifying the group’s earnings exposure.
Cerberus and Oaktree had bought Formica out of Chapter 11 bankruptcy in the US and had chalked up three years of earnings growth before selling to Fletcher at 7.2 times forecast 2008 normalised earnings including expected synergy benefits, including rationalisation of Australasian manufacturing and streamlining of raw material procurement.
Formica sits in Fletcher’s international division alongside Laminex and Roof Tile Group. Formica operating earnings before one-time items jumped 42 per cent to $88 million in 2017, contributing to a 27 per cent gain in earnings for international as a whole.
Morningstar values the international division at $1.36 billion or 7.5 times estimated 2018 earnings before interest and tax.
“Applying these same multiples to just Formica, we think a sale of Formica alone would have to fetch $730 million to be neutral to our valuation and would also lead to lower gearing and provide greater certainty about the business.”
It says Fletcher’s focus should be on businesses where it has the strongest competitive advantage – building materials and distribution (which includes the Placemakers chain).
“A sale of the Formica business would achieve those goals.”