Boral’s $3.4 billion windfall both a celebration and a headache

After trading up strongly in the first few hours Boral share price moved around during the day but didn’t recover to its morning highs.

Seven has already said it only wants to increase its stake in Boral to 30 per cent from its current level of 24 per cent. It’s plan was to effectively stand in the market and soak up stray Boral shares – a means to increase its holding more quickly than it could be using the creep provisions of the Corporations Act that allow it to acquire three per cent every six months.

In response to Stokes’ takeover offer Boral began acquiring its own shares more aggressively as part of an already announced buyback. While this move torpedoed the success of Seven’s takeover it also played into its hands.

Every time Boral buys back its shares, Seven’s stake goes up. In other words Seven gets a free kick in its quest to increase its holding. And by free I literally mean free because Seven doesn’t need to spend a cent.

Whether Boral sold its building materials business in the US too cheaply (or for a loss), depends on who is mounting the argument and the magic of accounting.

Suffice to say the price for the US business was higher than the value ascribed to it by the Boral’s independent expert, which was contained in the June 10 target statement and is $500 million or more than the analysts were expecting.

What it does give Boral is a war chest. The question is how best to use his armoury to fend off Stokes’ advances.

One obvious option is to undertake an even bigger buyback than the $700 million one currently being undertaken. That will land Boral in a corner – spending its own money in an exercise that will ultimately increase Seven’s stake, which in turn delivers it control and an additional representative on the Boral board. (Seven requested another board seat when it had 20 per cent – this was ultimately rejected after other large shareholders applied the blowtorch to Boral’s chairman, Kathryn Fagg.)

The other option is to give it back to shareholders via a return of capital – the most usual form of which is a special dividend. A back of the envelope calculation on this suggests that Seven would receive about $850 million given it holds around one-quarter of Boral’s shares.

Boral has little by way of franking credits, a special dividend is not a particularly tax effective way to reward shareholders. But it remains a likely alternative.

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Another possibility would be to spend the money and grow the business but realistically this is not an option for the Boral board which doesn’t have a mandate to buy assets – only to sell them.

In the end all roads lead to the same place. Seven will get to its target of 30 per cent ownership of Boral – with or without the help of Boral’s buyback.

There is speculation that Seven may increase its offer for Boral to $7 this week. There was similar talk last week based on chatter that Seven had sounded out major shareholders on that price.

That would certainly get Stokes to his target position sooner but he runs the risk of having an avalanche of acceptances – which he doesn’t think he needs (and doesn’t want to pay for) in order to get control of his quarry.

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