Brickworks Limited (BKW) Earnings Call Transcript & Summary

Good morning, and thank you for your interest in the proposed merger of Soul Patts and Brickworks announced today. My name is David Baxby. I'm the Lead Independent Director for Soul Patts. I'm joined by Deborah Page, the Lead Independent Director for Brickworks in making these opening remarks before handing over to the Soul Patts CEO, Todd Barlow; and Brickworks CEO, Mark Ellenor, to take you through the details of the proposed merger. This is an exciting day for both Soul Patts and Brickworks, as we announced the potential merger of our businesses, which have evolved considerably over the last few decades and supported the creation of long-term value for both sets of shareholders. We believe the time is right to bring our portfolios under one investment company to create a leading diversified investment house of real scale with a simplified company structure and more liquidity. I'll now hand over to Deborah to say a few words.

Thank you, David. I'm pleased to be here today on behalf of the Independent Board Committee of Brickworks, which we established some time ago to ensure appropriate governance arrangements given the cross-shareholding between our companies. The independent directors of our respective companies have, alongside management, invested a significant amount of time to get us where we are today with this merger proposal to create a new $14 billion ASX-listed entity. The proposed merger is unanimously recommended by the independent directors of Brickworks and the Soul Patts Board, each in the absence of a superior proposal and subject to customary separate independent experts, concluding and continuing to conclude that the merger is in the best interest of both Brickworks shareholders and Soul Patts shareholders. I'll now hand over to Soul Patts CEO, Todd Barlow.

Thanks, Deborah, and good morning, everyone. Mark and I will take you through the presentation, and we are joined by our respective CFOs, David Grbin and Grant Douglas, who are available for Q&A. Today is the culmination of a lot of work on both sides over many years to find an effective way to simplify the company's structure and generate positive benefits to both sets of shareholders. Soul Patts and Brickworks have this morning agreed to a merger, which will be affected by each company being acquired by a newly capitalized ASX-listed holding company, TopCo, via inter-conditional Schemes of Arrangements. This will remove the current cross-shareholding, which has been in place since 1969. It simplifies the corporate structure and in turn, supports more shareholder liquidity and a significantly expanded free float. TopCo will be more diversified across asset classes and continue to have a strong balance sheet and financial flexibility to pursue new growth opportunities. Topco would be governed by one Board led by Robert Millner as Chair and one exec team led by myself as CEO. Topco would have a market cap of approximately $14 billion and following completion will be renamed Washington H. Soul Pattinson and trade with our existing ticker SOL. Importantly, the governance, management and investment philosophy will remain the same. It is extremely important that we adhere to the same processes and disciplines that have been creating enduring success for our shareholders for many decades. As we illustrated on the previous slide, Topco has been established to acquire both Soul Patts and Brickworks, which will be affected by 2 separate but inter-conditional Schemes of Arrangement. The merger ratio is for Soul Patts shareholders to receive 1 Topco share for every 1 Soul Patts share currently held or at the record date. Brickworks shareholders would receive 0.82 TopCo shares for every 1 Brickworks share held at the record date. Based on the merger ratio and Soul Patts last closing price of $36.93 on the 30th of May, which was last Friday, the implied offer value represents an attractive premium to Brickworks shareholders, which is 10.1% to the closing price of Brickworks shares being $27.51 on 30 May, an 11.9% premium to the 1-month VWAP, 21.9% premium to the 3-month VWAP and when applied to the post-tax net asset value of Brickworks shares, the premium is 16.6%. It's worth providing context here that Soul Patts currently contributes the majority of the value of an existing Brickworks investment, which makes the premium even more significant when applied to Brickworks non-sole assets. On a pro forma basis, the combined group would have a net asset value of $13.1 billion, a market capitalization of $14 billion and a free float of some $12.6 billion. The proposed merger will remove approximately 148 million shares currently cross-held between Soul Patts and Brickworks and eliminate the cross holding. At scheme completion, Topco will be capitalized by the issuance of at least 34 million new TopCo shares. And today, TopCo has received commitments for $550 million of TopCo shares. Those shares will be issued at no discount to the prevailing Soul Patts share price and will only be issued if the scheme is implemented. Soul Patts and Brickworks retail shareholders were not able to participate directly in this equity raise as it relates to the formation of a new entity that is not yet listed and is contingent on a future scheme being implemented. This is a unique transaction, but one that shareholders have our firm commitment that this proposal has been structured to preserve and create value for all shareholders. It is expected that remaining TopCo shares will be allocated Firstly, to satisfy the demand created through a repurchase of any of Soul Patts' existing $450 million of convertible bonds and then to enable a global investment bank to use TopCo shares as a hedge to satisfy the demand for a potential new security exchangeable into TopCo shares. What this all means is that other than what is noted and described above, it will not be necessary for the scheme implementation that there'd be any other share issuances to the investor community. The merged entity will be well capitalized and despite significant share cancellation, will continue to be a large liquid ASX-listed company. I reiterate that we firmly believe that there is potential significant upside for all shareholders as part of the merged group as we continue to outline in this presentation. Upon implementation of the proposed merger, TopCo would be governed by one Board, of 8 directors and 1 executive team led by myself as CEO and Rob Millner as Chair. The transaction is unanimously recommended by the directors of Soul Patts led by David Baxby as our lead independent and by the independent directors of Brickworks led by Deborah Page. Their recommendation is subject to customary conditions, including the 2 independent experts each opining that this is in the best interest of the recent set of shareholders. Importantly, Soul Patts intends to pay a final FY '25 dividend in the ordinary course, and Brickworks intends to pay a dividend equal to the merger ratio per share applied to the SOL dividend. Key conditions include approval by both Soul Patts and Brickworks shareholders via relevant Schemes of Arrangement and the findings of the independent experts. The schemes are also conditional on the Australian tax office confirming, it is prepared to issue class rulings for shareholders, including scrip-for-scrip rollover relief and a binding ruling for TopCo. We expect scheme booklets to be dispatched to shareholders within -- with respective scheme meetings to be held in the second half of this calendar year, with further updates to be provided. I'll now expand on the strategy in more detail, including how TopCo creates a cleaner company structure that will be supported by a well-balanced portfolio. Currently, Soul Patts owns 43% of Brickworks and Brickworks owns 26% of Soul Patts. This cross-holding is the last of its kind and requires a unique approach. The future combined group, as illustrated on the right, would be 72% owned by existing Soul Patts shareholders. Existing Brickworks shareholders would own 19% and new TopCo shareholders will own 9%. This is an approximate ownership and depends on the final corporate structure. TopCo will operate as Soul Patts, but with a cleaner, simpler structure, and we expect it to be a more investable company as a result. This slide shows the proposed TopCo structure and how investors will gain exposure to a well-diversified portfolio currently worth over $13 billion in net asset value. On the left, we have Soul Patts strategic investments that houses many of our long-term holdings and would remain the largest portfolio even after removing the current holding of Brickworks. The property portfolio would be upsized, housing the industrial trust joint venture and manufacturing trust joint ventures of Brickworks. Our private equity portfolio would house the Building Products division of Brickworks. Our large caps credit and emerging companies portfolios will remain in place. Brickworks management team will remain in place to manage the building products and property assets. And consistent with our approach in other private equity assets, we will establish a small subsidiary Board to oversee the Building Products operations. This slide shows the enhanced shareholder liquidity we expect to see from the elimination of the cross shareholding. On the top left, you can see the uplift in the pro forma market capitalization to $14 billion. With the removal of the cross holding, the pro forma free float adjusted market cap uplift is significant. Soul Patts' current free float will increase from $8.4 billion to $12.6 billion on a pro forma basis. The bottom graph illustrates the positive impact that this would have on TopCo's relative position compared to peers. This illustrates why we believe we are creating a more investable company as a result of this merger with significant potential upside for all shareholders in the combined group. Turning now to recap the strategic rationale for Soul Patts shareholders before I hand back to Mark, to deliver his message for Brickworks shareholders. From Soul Patts' perspective, this is not just about simplifying the corporate structure. It's also about generating strong financial returns for our shareholders and increasing our exposure to solid investments at the right time in the cycle where we can assist with long-term value creation. We believe the merger will be accretive to both pre- and post-tax NAV and net cash flow from investments on a per share basis. The transaction will lead to significant rebalancing of Soul Patts' portfolio, including increased exposure to Brickworks Building Products division, which is expected to benefit from the long-term undersupply of housing, both here and in North America. As well as the enhanced exposure to Brickworks' high-quality industrial property assets with additional development opportunities. The increased allocation to property and private equity is a continuation of our strategic shift towards private markets that has been our focus since the Milton deal in 2021. And as I said earlier, financially, TopCo will be in a strong position from Day 1, and we will have significant capacity to pursue new investment opportunities as they arise. I'll pass over to Mark to talk about the transaction from Brickworks' perspective.

Thanks, Todd. For Brickworks shareholders, we see strong logic and rationale in unwinding the cross-shareholding ownership structure. Based on the closing share price on the 30th of May and a merger ratio of 0.82, Brickworks shareholders will receive an implied value of $30.28 per share. This represents a headline premium of 10.1% to Friday's closing share price and a 1-month and 3-month premium to the volume weighted average price of 11.9% and 21.9%, respectively. Additionally, this represents a 16.6% premium to post-tax net asset value. There is a significant diversification story for our shareholders to benefit from, gaining direct exposure from SOL's diverse portfolio of assets spread across private equity, credit and other growing asset classes, delivering cyclical protection and a strong cash flow generation profile. The outperformance of Soul Patts over a number of years is a remarkable achievement that speaks to the significant diversification of its portfolio and the quality of its management team. Furthermore, the consistent and growing dividend story is also very attractive for our shareholders. Having been with Brickworks for 25 years, the ongoing success of the business is incredibly important to me. This slide gives a visual illustration of the premium offer of Brickworks shareholders, which is strong for a merger of this nature, where both parties have a shareholding in each other. The current offer reflects a 16.6% premium to the post-tax NAV of $25.97 per share. Taking into consideration the cross shareholding, the offer represents a 57% premium to Brickworks non-SOL assets. The proposed merger will deliver cash flow accretion on a per share basis. The Brickworks independent directors recommend the proposed merger, subject to the absence of the superior proposal emerging and the independent expert report that this is in the best interest of shareholders. Turning to the next slide. Soul Patts' consistent and growing dividend story is also very attractive for our shareholders. This slide demonstrates the dividend and outperformance story that Brickworks shareholders will gain direct exposure to. Soul Patts has been able to demonstrate growing dividends over the past 24 years at a compound annual growth rate of 9.8%. The graph on the right shows the outperformance of Soul Patts against the All Ords Accumulation Index over the past 20 years, where an investment in Soul Patts has returned 3x the index. Turning now to the summary of key points announced today. What we have proposed is a transformational merger that mutually benefits both sets of shareholders. This announcement marks the commencement of unwinding a cross-shareholding relationship that has been in place for the past 56 years. The cross-shareholding served as a very important purpose, not least of which has been the creation of significant long-term value for all our combined shareholders. However, we believe this is the right time, and this merger is the right pathway through which to simplify the corporate structure, support additional shareholder liquidity and significantly expand the free float. Finally, we expect the scheme booklet, shareholder vote and implementation will all take place in the second half of 2025. We will keep shareholders informed with new information as well as key dates. We will now take questions, starting with the analysts who are on the line. Thank you, moderator.

[Operator Instructions] Your first question comes from Peter Steyn with Macquarie.

Perhaps just a question around the sort of operational versus investment intent of Soul Patts post this merger at a high level, Todd, how would you think about the operation of the Brickworks assets as an example, in the context of what has historically been a little bit more of a financial relationship with a lot of your operating businesses? And do you see any change in how Soul Patts goes to market on a go-forward basis in that context?

Yes. Thanks, Peter. I mean I think this is really coming full circle for us because for those who know the history of Soul Patts, we've been private equity investors for a long time and some of our biggest and most successful investments today like New Hope and TPG, as an example, started out as private equity investments. So we have had operating businesses sitting inside the portfolio before. And then we floated those businesses and retained meaningful stakes. So I guess we've always sort of maintained that close contact with the management teams and operators of those businesses. And then in the last sort of 4, 5 years and particularly this accelerated after the Milton merger, we've been building up a portfolio of private equity investments. And at the half, that was about $1.7 billion in value. There's 4 major investments inside that portfolio. And so we have been developing a capability to be able to help those businesses focus on long-term value growth by giving them supportive capital partnership, as well as some governance about focusing on how you build long-term value rather than succumbing to short-termism. And so with Brickworks, that fits very neatly. I mean, particularly the Building Products business fits neatly inside that private equity portfolio. And I think that Mark will continue to lead the management team to run that business. So from most aspects, it will stay exactly the same. No changes to brand names or customer relationships or really anything that the business does. But -- but we do think that having -- sitting in a private environment and being able to make long-term investment decisions with access to capital will be additive to that business. Mark, do you want to add anything on this?

No, I think from an operational point, Peter, it's really business as usual. I mean there'll be a subsidiary Board that will set up, Malcolm Bundy from our Board is coming across to the Souls boards, and he's got deep manufacturing experience and will continue to guide us on our path. So we're just excited with the new merger. And I think we'll be able to really focus in on building products and maximizing our returns as we come out of the bottom of the cycle.

Thanks. And if I may sneak one other one in the context of this transaction, tax has generally been a bit of a challenge over the years. What confidence do you have that you get the rollover relief?

Yes. I think the rulings that we're looking for are mechanical in their application of the existing laws. We have engaged with the ATO to ensure that there's no difference of opinion as to how those rules should be applied. We think it's pretty standard that rollover relief would be applicable in these circumstances. But of course, those rulings don't aren't forthcoming until completion, but we have a high level of confidence that they'll come.

Your next question comes from Rohan Gallagher with Jarden Group.

I was just curious, the conglomerate discount has been involved in the stock for many years. I was just curious as to the timing as to why you're sort of crystallizing it now. And in relation to that, are there any -- does this new structure provide a precursor for stuff that you can do now that you previously could not do under the cross-shareholding structure, please?

I wouldn't say that the cross-shareholding has held us back in a material way. I mean you can see from the trading activity that SOL has engaged in, particularly post the Milton merger. In the last 4 years, we've been averaging about sort of $6 billion of annual buying and selling activity. So there's plenty of liquidity inside our portfolio. The -- I think we've very much established ourselves as an investment company rather than a conglomerate. And I don't think we have been suffering from that sort of traditional conglomerate discount that others may face. That is not the case with Brickworks. I think the Brickworks business has been trading under its fair value for some time. And I guess that was one of the reasons why we wanted to think about doing a transaction like this. But it also, from a timing perspective, works nicely with us because we have been building that exposure to private markets in Soul Patts over the last 4 years, and it now is appropriate for us to hold the building products assets and property assets inside those portfolios that we've been developing.

And just an extension to that, Todd, does that mean that you could actually be in a better place now to pursue growth within the Private Market segment for building and property?

Well, I mean, I absolutely think that that's the case. And I think that, that is the benefit of our private equity assets is that we can provide capital for growth opportunities. In public equity land, you have to match up your acquisition with your capital raise or your source of funding, and that can be sometimes challenging to do, whereas in our case, we've got so much liquidity across the group that we can just fund acquisitions and growth opportunities as and when we see them.

Your next question comes from Suraj Nebhani with Citigroup.

Just one question and maybe keen to hear from both the SOL and Brickworks perspective as well. Just the timing of this deal and I guess, why now? And yes, I'm keen to understand if there's any other future potential deals that you see yourself as being better suited by being in the structure?

Yes. Thanks, Suraj. I'll go first from sort of Brickworks perspective. I mean we sort of look at the cross shareholding from time to time over the years. So it's nothing new that we reviewed it this time and been able to work up a deal with SOL's that benefits both shareholders. And really, over the years, and we've been involved in that for a long period of time, we haven't been able to come up with a deal that equally rewards both shareholders and drives the long-term value. So I think in this process, we've been able to come up with the offer that we presented today. I mean the Brickworks business, in particular, has grown a lot over 20 years, but the last 10 years, in particular, with the emergence of our significant property portfolio and also the growth in the investments following the SOL's business. So we're not just the brickmakers we were at the sort of turn of the century. And the longer-term shareholding costing has done us well through that time. Also, we just believe that the SOL will provide us additional support of capital. As Todd mentioned before, we know we're at the bottom of the cycle in both countries. We've invested quite heavily over the last decade as well and will put us in a really strong position to take advantage of the uplift over the medium term. In conjunction with that, our IBC has met regularly over that time period and taken Rob Millner and Todd Barlow out of the Brickworks Board for those particular meetings, and they unanimously support this at this time.

And from SOL's perspective, I don't think I can add too much to that. But other than to say this has been on the agenda on and off for over a decade. And both sides, I know, have always looked at ways that we can deliver value to shareholders, but it's not easy to achieve that because it is a unique structure. There's lots of moving parts, lots of complexities, and we wanted to make sure that we could deliver an outcome that benefited both shareholders.

Your next question comes from James Casey with Ord Minnett.

I had a question with regards to the equity issue. I just wonder if you could clarify the Brickworks current debt, the value of the Soul convertible bond and then the transaction costs. I'm sure they're probably in the fine print somewhere, but if you could clarify those numbers, that would be great.

So the current -- Grant, do you want to take the bit about the Brickworks current debt?

Yes. I mean we've referenced the January debt numbers, which is our last reported debt at [ $721 million ] net debt. So that's the level that we've sort of referenced in the documents.

And with the equity raise, taking into account all of the group debt, including Brickworks debt as well as Soul Patts' convertible bond and the new issuance of 34 million shares by TopCo will leave the merged entity in a net cash position.

Right. Okay. And the transaction costs?

I don't think they're finalized, but there is stamp duty, which is something in the order of a couple of hundred million, $200 million...

Okay. And just the at least comment, just the at least 34 million shares, why at least?

Well, I think it depends on a few things and particularly, given the back-end nature of us dealing with our current convertible bond. So with the transaction happening, our convertible bond will be most likely redeemed. But of course, that's subject to convertible bondholders and the share price at the time. And then we will also look at if we were to redeem that convertible bond issuing a new instrument that will be exchangeable into TopCo shares, so something that is similar in nature to the convertible bond that will be redeemed, but that will be subject to investor demand at the time. But in terms of the equity -- the straight equity issuance, other than the $550 million of demand that we received today, there will be no further equity issuance.

There are no further questions from the analysts on the line at this time. I'll now hand back to Courtney Howe for any written questions on the webcast.

Thank you, moderator. So now turning to some of the written questions that have come through, and I will start by throwing this to you, David Baxby, as it relates to governance. Does the appointment of only 1 of the 4 Brickworks independent directors to the proposed TopCo Board suggest that this is more of a takeover than a merger? How was Board composition determined?

Thank you for the question, Courtney. Look, the Board composition was something that was given very serious consideration. We go through a fairly rigorous annual process where we've got a skills matrix that's been laid out and refined over many years. And we have gone through some recent Board renewal, and I was obviously the benefit of that pieces of renewal. But then as we considered the extent of the portfolio and the addition of the incremental expertise that we needed, primarily focused on manufacturing and primarily focused on building products, we felt that it was appropriate to add an incremental director being [indiscernible] . He brings an enormous range of experience in the skills that we need. And we, therefore, feel that as we then consider that in whole, that the Board on a go-forward basis will have the appropriate mix of skills and experience to manage the overall portfolio.

Thank you, David. Next question, I'll throw this to you, Todd. When Soul Patts bought Milton, there was a significant sell-down of shares for capital to be directed into private equity and private credit, et cetera. Does Soul Patts similarly intend to sell down Brickworks assets or keep them as is and build on their quality assets? Will it affect the Brickworks joint venture with Goodman?

Yes, the short answer is no. As I said earlier, the property assets and building products assets fit perfectly into that strategy that we've been adopting to increase our exposure to private markets. And so when we took the public equities in the Milton transaction, we utilized some of those public equities to rebalance the portfolio and use that as a liquidity pool for this move into more private assets. But in this case, what we're inheriting through this merger are private assets, which fit very comfortably with our current strategy.

Thank you, Todd. Next question is, how come retail shareholders have been excluded from the capital raising?

The short answer is that it's not something that's capable of being taken up by retail shareholders. This is an issuance by TopCo, which currently is not listed and only comes -- becomes listed on completion. And it's a capital raise that is conditional on completion actually happening. And so with that in mind, we were very conscious about ensuring that that capital raise wasn't done at a discount and therefore, dilutionary to our existing shareholders. And so you'll see that, that placement was again conducted at 0 discount to close. But our view is that the transaction overall is very accretive to shareholders and our shareholders will be looked after.

Thank you. There are a number of different questions coming through about the ATO and tax implications. So I might just ask you, Todd, if you can discuss at a high level why the ATO approvals are required.

Well, it's customary in deals of this nature that you do get a ruling from the ATO that script for script rollover relief will be available to both sets of shareholders. And that means that there is not a crystallization of -- or a capital gains tax event on the acquisition by TopCo. So whatever a shareholders' tax cost base is today will be carried through into the future. That is a pretty standard set of rulings that need to be applied for and granted. And then TopCo will also apply for some rulings around how to treat the assets that are being acquired by TopCo.

Given this deal involves Soul Patts pivoting towards brick manufacturing and property, will the LIC component be downgraded going forward, particularly given the pivot to private markets?

Well, Soul Patts has never been an LIC in the definition of listed investment company that I think you're referring to. And for that reason, because we're an investment house with some operating assets with some concentrated investments across large listed companies, the diversity of what we do does not fit into a traditional LIC criteria. And in that regard, S&P has always considered us a company and it included us in the various indices.

Thank you. Next question. Am I correct in understanding that the intention is to move to 0 debt for TopCo? If so, given the track record that SOL has had in delivering a positive return on borrowed money, is it not conservative use of debt? Is not conservative use of debt appropriate in achieving better returns for shareholders?

Yes. Thank you. I mean we do employ -- I mean, most of our investments have an appropriate level of corporate debt. But -- and so then our view is that if we were to employ lots of gearing at the holdco or TopCo level, then it's sort of gearing on gearing. Now of course, with our track record and with the investment returns that have been available, that would have been additive. But from a risk perspective, our view is that we've always been lightly geared. And then I think there's also a view on the cycle as well. And our view is that the right time to be geared is when things are really cheap. And the right time to have cash is when the market looks expensive. And so certainly, post this transaction, we will be net cash.

Thank you. The next question is around cost synergies and what we can expect from the merged entity as there will be a reduction in duplicate costs over time?

Yes. I don't think that that's a meaningful driver for the transaction. I mean there will be some savings. Obviously, you don't have to pay 2 sets of listing costs. But given that we're going to keep the existing management teams and operations in place and it's business as usual, synergies are not a major driver for the transaction uplifts and values that we're creating.

That's all we have for questions via the webcast. I will just repeat that there will be a recording of this presentation available on our website shortly within the next couple of hours. And with that, I'll hand back to you, Todd, for closing remarks.

Well, thanks, everybody, for joining. And I apologize to the people who weren't able to make it because we did get inundated with people joining the call today, and that's great that there's so much interest in this transaction and in our business. It's extremely exciting times for both of our businesses. I think that we're proud of the fact that we've been able to engineer a merger where we can say that both of our shareholders are going to do very well out of the transaction. And we look forward to continuing to update the market as we progress the transaction over the next several months. And thanks again for your interest today.