Soul Patts and Brickworks have agreed to merge. The new combined entity will also raise about AUD 1.3 billion of new equity to cover transaction costs and reduce debt. Since the announcement, shares in Brickworks and Soul Patts were up 28% and 16%, respectively.

Fundamentals don’t justify rally

The market likes the deal, and we agree that it has merits. It fixes a long-standing governance issue by eliminating the cross-shareholding, boosts free float, and may result in ASX 50 inclusion. Given the positive market reaction, we expect the merger to go through.

We don’t see material synergies and neither does management. Cost-cutting in Brickworks isn’t on the table, and savings from lower listing fees are negligible. The merger doesn’t create value, so fundamentals don’t justify the share price rally.

Instead, the merger reallocates value between the existing shareholders of Soul Patts, Brickworks, and the new investors in the institutional equity raise. One plus one still equals two, and for every winner, another party must pay up.

Merger undervalues Brickworks

The merger undervalues no-moat Brickworks, and we cut our Fair Value estimate 9% to AUD 29 per share. It would lift Soul Patts’ fair value estimate by about 3%, but this is offset by transaction costs. Our AUD 35 fair value estimate stands.

Both companies are overvalued after the rally. Perhaps Soul Patts shareholders expect more demand from passive money, and indeed, many large caps we cover trade at a premium.

The combination of the two companies is likely to see extra near-term demand for the shares. But to unwind the cross shareholding, Brickworks shareholders will need to pay. We will make a call on the relative merits of this when we see a scheme booklet.

Scheme booklet and vote to follow

A scheme booklet and subsequent shareholder vote is expected in the second half of 2025. If the deal falls through, we will revert to our stand-alone AUD 32 and AUD 35 fair value estimates for Brickworks and Soul Patts, respectively.

If the deal proceeds, about AUD 1.3 billion of new equity in the combined entity will be raised from institutional investors. The proceeds will be used to pay down debt and cover transaction costs.

AUD 550 million of this is fully underwritten at AUD 36.93 per share, Soul Patts’ undisturbed share price. This raise is at a 6% premium to our AUD 35 fair value estimate for the combined entity and is therefore modestly value-accretive for existing Soul Patts and Brickworks shareholders. However, the size of the premium and the amount of equity issued is too small to materially affect the fair value estimate of either company.

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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

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