Orica's Explosive Performance Defuses Chance Of $10bn Private Equity Raid
The Age
Tuesday May 1, 2007
ORICA'S Graeme Liebelt has closed the door - gently, but emphatically - on the $10 billion private equity tilt at Orica. Orica's March-half result, with its impressive increase in profit, big boost in dividends and an optimistic but vague promise of more to come has left Orica almost private equity-proof. It would take a spectacular price to put pressure on the company.
It is apparent that Orica has studied and learned from the predecessor transactions and the Coles Group's handling of its overtures from private equity in particular.Yesterday's results presentation was very much a business-as-usual affair, with little time spent on the approach from Bain Capital, Blackstone, Pacific Equity Partners and Morgan Stanley Principal Investments, and nothing in the presentation that could be seen as a specific response to the approach.Yes, Orica was continuing to review its portfolio and the future of its consumer products and chemicals businesses but that was routine, rather than a response to the consortium, and the impression given was that there were no imminent decisions to be made.Orica has treated its private equity threat as something interesting but largely irrelevant. If it was forced to, it could consider accelerating the outcome of its review and could create options for delivering shareholder value, but it doesn't see itself as under any pressure to do so at the $32-a-share level of the approach. It has kept its options open. And it can afford to. The growth in its businesses that resulted in a 39 per cent increase in underlying earnings is supported by the strength of its positions in its markets, the attractive fundamentals of its core mining services business and the benefits yet to flow from its recent acquisitions.As Liebelt said, Orica is the global leader in mining services, with a market share of more than 25 per cent, double that of its nearest competitor. In the context of the resources boom, that makes it uniquely valuable.Orica was careful not to fall into the Coles trap of variously saying too little or promising too much, but then it doesn't have Coles' history of controversies and disappointments, nor is there a Woolworths for it to be compared with, and it certainly doesn't have a disenfranchised major shareholder stalking it.The only obvious risk for Orica is that it creates expectations it can't meet and that market disappointment makes it vulnerable to a new approach from private equity.There was nothing in yesterday's results or the presentations that would appear to generate expectations Orica might struggle to meet. It would probably take a change in industry conditions for Orica to be made vulnerable.The market has digested the news of the private equity approach, and Orica's rejection of it, comfortably. There are no indications of the kind of hedge fund activity that destabilises companies and their boards and creates vulnerability, nor any sign of shareholder discontent with the board's rejection of the approach.Unless they are prepared to put a massive price on the table, the private equity consortium will now presumably fade away, to re-form only if Orica does stumble in the near term - which has to be considered most unlikely.BRAMBLES' appointment of its chief financial officer, Mike Ihlein, as its new chief executive provides some insight into the thinking of chairman Don Argus that might be relevant to Argus' "other" search, the hunt for a new chief executive for BHP Billiton.The appointment of Ihlein wasn't a surprise because he and CHEP's chief operating officer, Dave Mezzanotte, were seen as the leading internal candidates to succeed David Turner. Ihlein had been recruited by Turner from Coca-Cola Amatil to play a key role in the turnaround of Brambles.The choice of Ihlein, whose background has mainly been in senior finance roles, over the highly regarded Mezzanotte, who is more of an operational executive, fits with Argus' philosophy that to manage big international businesses it is critical CEOs have a mixture of commercial and financial skills. They have to be able to manage a balance sheet as well as provide leadership for an international business.Argus chaired the board that appointed Chip Goodyear to succeed Paul Anderson, who recruited Goodyear as CFO to help clean up the then-reeling group. The choices of Goodyear, and now Ihlein, perhaps provide pointers to Argus' preferences.Brambles, as with BHP when Goodyear succeeded Anderson, is in good shape. It has a strong balance sheet and swelling profits after Turner presided over a massive restructure. The challenge for the incoming CEO isn't so much operational as the need to develop growth and capital management strategies that build on Turner's foundations.Ihlein was heavily involved in developing the strategy that saw Brambles embark on the massive sell-off of non-core businesses and the unwinding of its dual-listed entity structure that left it with the high-growth businesses of CHEP and Recall within an Australian-listed entity. His appointment ensures continuity of the strategy and of the approach to balance-sheet management.Brambles' choice of its new CEO came after a global search, similar to the one now occurring for Goodyear's successor at BHP, where again the leading candidates, Chris Lynch and Marius Kloppers, are internal. Lynch, a former chief financial officer, probably has a CV closer to Ihlein's (and Goodyear's, for that matter) than Kloppers, whose background is more commercial.bartho@theage.com.au
© 2007 The Age