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Ignore Seven offer for now, Morningstar tells Boral shareholders

Lex Hall with AAP  |  13 May 2021Text size  Decrease  Increase  |  
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Seven Group’s $8 billion takeover offer for Boral is underdone and shareholders in the building materials company are urged to hold tight for now, says Morningstar.

Boral shares were expensive before the announcement of Seven’s bid on Tuesday, trading at a 27 per cent premium to the $5.10 per share fair value estimate set by Morningstar analyst Grant Slade.

At the close on Thursday, Boral was trading at $6.77. Shares in Seven were lower by 1.38 per cent to $20.00, roughly fairly valued according to the $23.40 of Morningstar analyst Mark Taylor.

Boral (BLD) and Seven West Group (SVW) - YTD

A chart showing the YTD share price movement of Boral and Seven Group Holdings

Source: Morningstar Premium; data as of 13 May 2021.

Seven’s offer is conditional, and Slade recommends Boral shareholders wait until the end of the offer period, which is set to be 25 June, and reassess Seven’s bid—and any other offers that arise—against Boral’s prevailing market price at that time.

“Seven’s bid remains conditional and therefore has no bearing on our stand-alone fair value estimate for Boral,” says Slade.

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“As a result, we continue to view divestment of Boral shares at or near its currently elevated share price as a good outcome for shareholders. However, with Boral shares currently trading above Seven’s offer price, Seven’s offer may not represent the best outcome Boral shareholders can ultimately achieve.”

No-moat Boral (ASX: BLD), Australia’s largest construction materials and building supplier, encouraged shareholders to reject Seven Group's takeover offer, saying the bid undervalues its target.

Boral on Tuesday said the off-market bid of $6.50 per share was opportunistic and offered no premium on the closing price of shares on Monday ($6.50).

Kerry Stokes' Seven Group (ASX: SVW) owns 23 per cent of Boral—worth around $1.8 billion—said the premium was 54 cents. This was based on a price of $5.96 per share, which was the average paid for shares after Seven increased its stake on 8 April.

The 76 per cent balance of the Boral shares are valued at $5.9 billion, at the bid prices, says Taylor.

“That’s quite a bite in relation to Seven Group’s circa $7.6 billion market capitalisation.

“But we doubt the company will require anywhere near that much cash near term. It is a master at creeping up share registers and admits it would be happy simply to increase to 30 per cent interest in Boral—there is no minimum acceptance bid condition. Achieving 30 per cent equity would cost it just $530 million, close to the value of cash proceeds recently raised.”

Seven made its latest bid off the market due to takeover rules preventing it buying more shares at this time.

Building materials providers such as Boral are well-placed to benefit from major economies recovering from the coronavirus pandemic.

A Boral committee, which did not include Mr Stokes' son and Boral director Ryan, unanimously recommended shareholders refuse the offer.

Seven said it would be satisfied if it gained 30 per cent ownership.

The offer will be put to Boral shareholders from 25 May.

. Lex Hall is content editor with Morningstar Australia

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