Speculation heats up on Wesfarmers bid for Fletcher

NEW Zealand-based construction company Fletcher Building likely meets the takeover criteria of Australian retail and resources heavyweight Wesfarmers, according to analysts at a leading investment bank.

Morgan Stanley analysts say Wesfarmers, which owns heavyweight hardware retailer Bunnings, already has some expertise in the industries in which Fletcher operates.

Bunnings and Fletcher have “considerable overlap” in the New Zealand home improvement market, they say.

The comments come amid speculation Wesfarmers could be poised to launch a takeover bid for Fletcher on the back of reports the Australian group has accumulated a stake of 3 per cent to 4 per cent in the construction company.

“Fletcher Building’s Placemaker business competes directly with Bunnings in New Zealand,” Morgan Stanley analysts said in a report for investors.

“Many of Fletcher’s other businesses either sell directly or indirectly to the housing industry where Wesfarmers has significant knowledge through Bunnings.” The investment bank speculated that the New Zealand competition regulator might require Wesfarmers to sell Placemaker if an acquisition were to eventuate.

They described Fletcher as a business that “hasn’t executed as well as it could have” and said its capital may be constrained as it faced potential balance sheet issues after it breached its banking covenants in February. Key banking covenants under its banking syndicate and a US private investment agreement had been breached due to losses in the building and interiors business, the company said at the time.

Before the covenant breaches, the group had available funding of $NZ3.1 billion and total net debt of $NZ2.1 billion.

For the first-half of its financial year, Fletcher booked a $NZ273 million net loss, also due to heavy losses in its building and interiors unit.

Wesfarmers is yet to comment on the speculation, and Fletcher on Friday would not confirm or deny the reports.

“The company has no knowledge of Wesfarmers owning Fletcher Building shares,” Fletcher said.