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Boral’s new broom cements role of three activist shareholders

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Todorcevski has a CV that looks fit for purpose. He has a wealth of experience in finance and strategy – perfect for a cost-cutting candidate – and is handy with an asset clean-up broom.

And that’s just what these shareholders are looking for.

Many of Australia’s large companies are “unowned” in investment parlance.

This means that their shareholder base is dominated by large index (often offshore) funds that don’t get involved with boards and management. Typically these unowned companies have a rump of small retail shareholders who are both sticky and supportive of boards and management. These companies are way less accountable for their performance or mistakes.

But Boral is now well “owned”.

Meanwhile, it is no accident all three have turned up as significant Boral shareholders over the past six months. Seven Group bought its 10 per cent stake only a few weeks ago and Perpetual moved to become a substantial shareholder in May.

Boral is a classic turnaround punt for an activist shareholder.

The company is a cyclical play with plenty of high-quality assets but one that has made its fair share of mistakes. And its share price this year has reflected both the mistakes and the softness in the construction market rather than its potential for a turnaround.

But the five profit downgrades it has posted in less than two years suggests the board had given too long a lead to Kane.

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When in December Boral revealed an extraordinary and embarrassing accounting scandal at its US windows business, the board had had enough.

It was already apparent that the $3.5 billion acquisition of US construction business Headwaters in 2016 had not lived up to its promise. Kane owned the decision to buy Headwater.

But even after the windows snafu, Kane chose not to fall on this sword – instead providing a slightly vague amendment to his retirement timeline of between one and two years.

When Boral again addressed investors in February about COVID-19 impacts, Kane’s departure date was brought forward to August.

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But shareholders were looking for more immediate action. Insiders said they were very pleased that the new chief executive would be putting his feet under the desk by the start of July, which means he gets his hands on the tiller of the strategic review.

There is now an expectation from many analysts that Boral will be looking at a major write-down on the underperforming US business, a capital raising or both.

A write-down sits perfectly with the “fresh management” playbook of cleaning up the balance sheet.

Ultimately shareholders would like to dispose of the majority of the US operations, which analysts rightly argue had dragged down Boral’s return on capital.

However, at least one of the trio of activists, who preferred not to be named, has expressed a view that an equity issue would not be popular. He said there was no need for an issue and that there was enough headroom in Boral’s banking covenants to support a write-down of up to $3.5 billion.

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Back in December, Wylie and his team at Tanarra had delivered the Boral board a road map for its future that included asset sales which they said could provide Boral a fortress to protect it from an opportunistic takeover. Wylie was sent packing.

Stokes, whose Seven Group says he is supportive of the board, is also keen to see Boral exit the US business.

Seven told its own shareholders last week the weakness in Boral’s share price gave it the chance to build a stake but added it had no intention to make a full takeover.

The board and the three shareholders are now simpatico. None of the shareholders needs to agitate for a board spill because they now own the board.

Todorcevski made it clear that the board and the investors are now on the same page.

“As the board made clear to me through the selection process, there will be no sacred cows when it comes to our strategy and our portfolio,” he said on Monday.

Sounds neat enough for now. But it will be fascinating to see what happens if the shareholder strategies diverge.

For example, watchers of Stokes’ strategy over the years expect he will use the 10 per cent as a base from which to creep. That might not prove so popular with fellow shareholders.

One to watch.

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