Christopher Niesche: Australian billionaire Kerry Stokes soon to notch up another big win with Boral play

OPINION:

It is unsurprising Kerry Stokes has outmanoeuvred the Boral board as he tries to gain control of the building materials company on the cheap.

The billionaire has always had to outsmart and outfox business rivals as he rose from his inauspicious beginnings to build a fortune in the media and construction sectors.

He never met his mother, an unmarried 20-year old barmaid Marie Jean Alford. Born John Patrick Alford on 13 September 1940 in Melbourne, he was adopted out to Matthew and Irene Stokes, an impoverished Catholic couple. One early home was at Camp Pell, the Melbourne post-war slum housing area.

Things didn’t get easier for Stokes, who suffered from dyslexia, when he dropped out of school aged 14, turning away from his adoptive parents for life on the streets, where he stayed on and off for a few years.

He started building his fortune when he moved to Perth in the 1960s. One of the future television network owner’s first jobs was installing TV antennae of Perth’s rooftops.

Unlike Melbourne, where business was run by the stuffy old-money establishment, 1960s Perth was a booming frontier town open to all comers. Stokes made his first millions there, in property development.

A suggestion from TV mogul Bruce Gordon that he buy a regional television station in Bunbury in Western Australia, so he could promote a shopping centre he owned there, put him on the path to media ownership. His company, Seven Group Holdings, now includes the Channel Seven TV network, a range of papers, national equipment hire group Coates Hire and the a heavy equipment dealer operating lucrative Caterpillar dealerships in Australia and North Eastern China.

The A$7.2 billion fortune amassed by Stokes, despite such unpromising beginnings, is testament to his toughness and cunning. He has brought these qualities to his push to control Boral.

Stokes’ Seven Group already owns 23 per cent of Boral and has lobbed a A$6.50 a share takeover bid to lift his stake to 30 per cent, which will give him enough votes to win half of the company’s board seats and hence gain control.

Boral is arguing the bid materially undervalues the company and, if Stokes wants to take control, he should pay a premium on the current share price, as most acquirers do.

But Stokes is not most acquirers and in the past gained control of West Australian Newspapers, Beach Energy and the Seven Group itself by patiently buying up stock on the market rather than launching a fully-priced takeover bid.

His bid for Boral is no exception. Accounting firm Grant Samuel places a value on Boral of between A$8.25 and A$9.13 a share – well above Stokes’ A$6.50 a share offer.

The Grant Samuel Target Statement – an independent valuation takeover targets are required to obtain – highlights Stokes’ strong strategic position.

“The Seven Group holding does allow it to effectively block special resolutions and, in particular, it can effectively block any acquisition by a third party through a scheme of arrangement,” the accounting firm says. The firm notes another bidder could still make a successful takeover without Stokes’ support but this would be a lot more expensive.

With Stokes already in the box seat, Boral’s response was a strange one. Believing the shares are undervalued by Stokes and the broader market, the company launched an on-market buyback. This means it buys shares from investors on the stock market, with the extra demand pushing the price up.

So far, so good – the Boral share price is now a lot closer to A$7 than to A$6.50. However, under a buyback, each time a share is purchased by the company it cancels the share. This reduces the total number of shares on issue, with the result that each share makes up a larger portion of the company that it did previously.

Stokes won’t be selling his shares in the buyback, meaning the shares he owns will ultimately represent more of the company. By the time the buyback is finished, the 23 per cent of shares he owns now will actually make up 25 per cent of Boral.

What’s more, it won’t have cost Stokes a cent to get closer to his target.

From there, he can increase his offer to get to the 30 per cent he wants, or use what are referred to as “creep provisions”, which allow someone who owns 20 per cent or more of a company to buy 3 per cent of company every six months without having to launch a takeover bid.

Stokes has already done very well out of Boral. He bought his initial 20 per cent stake last year when the shares were languishing at around $3.30.

By this time next year he will likely have control of the struggling building materials company, just in time to take advantage of its current turnaround and an improving outlook for building.

All without paying a premium for control.

It looks like the dyslexic boy from the slums of Melbourne will soon notch up another big win.

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