NZX far too small to lose big player like Fletcher

Investors here would welcome Oz buy-in but not losing it altogether

Many local fund managers will be quite happy with the rumours of the Australian crowd taking a small stake in Fletcher Building. With the share price slumping to near-decade lows recently, around 40 per cent down on 18 months ago, they’ll take any reprieve they can get.

However, if the speculation has any truth to it, I’m not sure the investment community here would welcome a takeover with open arms.

Our sharemarket remains tiny by global standards. Even as a proportion of our overall economy, which should make for more appropriate comparisons, it’s far from as big as we’d like it to be.

We haven’t had many new listings lately, not since the electricity companies were partly floated a few years ago. A few smaller companies have exited the market after takeovers, and there was the high profile departure of Xero.

Fletcher Building certainly isn’t the behemoth it once was. Ten years ago it was our third largest company by market capitalisation but these days it’s not even in the top five.

It’s still important, mind you. Regardless of the recent stumbles, Fletcher is still a dominant player in its industry and one of few large cyclical companies to choose from.

With that in mind, there would be great reluctance to let it disappear from the NZX, regardless of how attractive the price might be.

Besides, why would anyone think Wesfamers, the Perth-headquartered conglomerate, could do any better?

They’re probably best known here for the Bunnings chain, which is an extremely good business across Australia and New Zealand.

Wesfarmers has made its share of mistakes though. In 2016 it bought British company Homebase with the intention of rolling out the Bunnings model in the UK. The idea was right but poor execution and misjudgments about the market meant it didn’t go to plan. They’ve since substantially written down the value of Bunnings UK.

The other big asset in the Wesfarmers’ portfolio is the former Coles Group. This includes the Coles supermarket chain in Australia, as well as discount retailers Kmart and Target. They’ve done well with Coles, closing the gap with market leader Woolworths over the past decade.

However, the timing of that one could have been better, so they don’t get any points for judging where we are in the cycle. In late 2007, Wesfarmers’ A$22 billion takeover of Coles was the biggest in Australian history.

Unfortunately, the move coincided closely with the peak of global sharemarkets. While they’ve done some great work operationally with Coles, in hindsight they paid far too much for it.

Fletcher has delivered shareholders a mediocre return of 1.3 per cent per annum (including dividends) over the last decade. That’s well behind 9.1 per cent for the NZX 50 index, and it doesn’t even beat bank term deposits.

However, Wesfarmers hasn’t been much better, having returned 3.5 per cent per annum over the same period and similarly lagging the Australian sharemarket. Mark Lister is Head of Private Wealth Research at Craigs Investment Partners.