As time of writing, the stock price of Steel & Tube Holdings Ltd [NZX:STU], the almost billion-dollar New Zealand metal-merchandising company, has increased 1.92% today. The share price is at $1.59.
This increase is very interesting given that Fletcher Buildings Ltd has only just confirmed their proposal to acquire Steel & Tube yesterday, 3 October 2018. Fletcher Buildings Ltd plans on purchasing all of the company’s ordinary shares for $1.70.
Fletcher Building CEO Ross Taylor commented that ‘An acquisition of Steel & Tube is a unique opportunity to create the leading steel distribution business in the New Zealand market.’
This vertical supply chain acquisition Fletcher Buildings Ltd is investing in is in alignment with a five-year plan revealed in June by the company to ‘…focus on the New Zealand and Australian building products and distribution sectors.’
So why has Steel & Tube Holdings Ltd [NZXSTU] risen?
The recent rise has most likely been because of the announcement of this acquisition yesterday. The acknowledgment of the company’s value by an industry giant such as Fletcher will be seen favourably by the market.
According to Fletcher Building Ltd, the current issued shareholders — who collectively own 20% of the company —support the plan of acquisition.
They agree that the board of Steel & Tube should ‘…in good faith, progress the development of the proposal with Fletcher Building.’
Where can Steel & Tube Holdings Ltd go from here?
Steel & Tube appears to be undervalued at the moment.
But is this deal with Fletcher what the shareholders really want?
Just five months ago, Steel & Tube was trading at $1.832. And 13 months ago, they were trading at over $2.00.
Perhaps this acquisition is an attempt to undervalue the company and snap it up at a discount.
The board of Steel & Tube responded yesterday, announcing that they are not in support of the indicative offer. They believe that the $1.70 offering is too low and undervalues the company.
If Fletcher seeks to acquire Steel & Tube, they will have to be cleared by the Commerce Act. This would take some time as Fletcher already owns a significant size of the steel market and have a large vertical presence. So the acquisition of Steel & Tube could make Fletcher too much of a monopoly in the industry.
In the same way that the Commerce Commission denied Qantas’ bid to acquire 20% of Air New Zealand back in 2003, a similar result could happen here.
With that in mind, more negotiation might be needed for the Steel & Tube acquisition to go ahead. But, all in all, this is good result for the company. The market may adjust soon to accurately represent its true value.
Editor, Money Morning New Zealand
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