We follow up with further details on no-moat Seven Group’s (ASX:SVW) $6.05-$6.25 scrip bid for no-moat Boral (ASX: BLD). The industrial services and energy conglomerate is launching an off-market mop-up bid for the 28.4% of the construction materials specialist it doesn’t already own.

We previously increased our fair value estimate for no-moat Boral by 7% to $4.70, assuming a 50% chance that Seven Group’s bid would be successful. We did not change our $30.50 fair value for no-moat Seven Group, with any dilutionary impacts likely to be offset by removing duplicated corporate costs and other synergies.

Based on Seven Group's share price of $40.77 before the proposal, its bid equates to a minimum consideration of $6.05 per Boral share, comprising 0.1116 Seven Group shares and $1.50 cash. But if Seven Group reaches the 90.6% compulsory acquisition threshold, the offer increases to $6.25, including an additional $0.20 per share in cash. The minimum consideration represents a comparatively skinny 3.4% premium to the Boral share price prior to the bid and, at the maximum, a 6.1% premium. The offer is final and won’t be increased.

Based on our stand-alone fair value estimates of $30.50 for Seven Group and $4.40 for Boral, we recommend that Boral shareholders accept the offer. We estimate they get between $4.90 and $5.10 of value per share. That is an 11%-16% premium to our $4.40 stand-alone Boral fair value estimate. The premium is considerably higher, 38%-42% if Seven Group’s current share price is used instead of our fair value estimate, but share prices can readily retrace.

The offer is open and scheduled to close on April 4, 2024, unless extended or withdrawn. It has also been declared unconditional. Boral shareholders now have the option to accept on a conditional basis. That is, accept only on the condition that the cash component of the offer reaches at least $1.60 rather than the minimum $1.50.

Seven Group’s business strategy

Seven Group Holdings' industrial equipment businesses, WesTrac Australia and Coates Hire, provide solid revenue and cash flow via exposure to the local government, civil construction, and mining sectors.

A more recent 73% stake acquired in building products and construction materials business Boral adds to the infrastructure thematic. Demand for mining services equipment is a major determinant of earnings. This is an advantage given government predilection for stimulus via infrastructure investment.

A 30% stake in Beach Energy provides a growing energy exposure with leverage to oil and gas prices. The company's media investments are in large listed domestic television, newspaper, and magazine companies. The major media investment is a 40% shareholding in Seven West Media. Other investments include a portfolio of S&P/ASX 200 index dividend-paying shares.

WesTrac's operations are the key strength of the group, providing the majority of earnings and cash flow. WesTrac is the sole authorized Caterpillar dealer in Western Australia, New South Wales, and the Australian Capital Territory. It provides heavy equipment, servicing, and support to large companies operating in the construction and mining industries, particularly the iron ore and coal sectors. While Caterpillar dealerships may be terminated with 90 days' notice from either party, we see no reason for the more than 20-year relationship in Western Australia and more than 10-year relationship in New South Wales to cease any time soon.

WesTrac also owns 100% of Coates Group Holdings and 100% of AllightSykes. Coates is the largest domestic general equipment hire company. Cost benefits exist between WesTrac, AllightSykes, and Coates, through sharing of purchasing and other head-office functions. Increased mining capital expenditure and infrastructure construction drive heightened demand.

The media investments cover free-to-air television, pay television, regional television, newspapers, magazines, and online media.