"WES buying into Fletcher Building FBU , the perennial underperformer!!!?"
@Dejavoo,
Not sure how much credibility there is to this story.
But, either way, I have to say that, as a WES shareholder, this prospect does not imbue me with that much enthusiasm.
Although it might be worthwhile pointing out that while FBU has been an chronic under-performer in recent years, for a large part of its listed life the company actually performed quite credibly; sure, its earnings always displayed cyclical characteristics (to be expected given the vagaries of construction cycles), but it was traditionally a significant generator of free cash flow and its balance sheet was maintained in good condition, resulting in the ability to generate strong capital returns to shareholders.
However, since about 2008, Fletcher Building has been guilty of some inordinately poor capital allocation decisions, notably a in relation to a series of ill-considered, debt-funded acquisitions which has left the company with limited financial flexibility today and where the servicing of its debt burden consumes
thirty three cents out of each dollar of Operating Cash Flow (and that's just the interest component, before reducing the debt principal).
The problem with FBU is that it urgently needs to take some restructuring medicine in some of its business units, but because it is financially strapped, it can't afford to do so.
[*]
If FBU was able to service the contingent liabilities that would be crystalised on the shutting down some of its unprofitable businesses, there would be an immediate and meaningful earnings uplift
And that, I suspect, is where WES's balance sheet will come in in the event that WES does acquire FBU... in the value uplift from WES being able to aggressively restructure FBU's array of businesses, some of which have been a multi-year drag in the company's earnings and cash flows.
I think there are far better quality businesses around than FBU, but I would understand why WES would want to buy a business like FBU: from a value-creation standpoint there is sure to be a lot of low-hanging fruit... for someone that has the financial wherewithal to access those value creation opportunities within FBU.
[*] (NIBD-EBITDA ~3.0x and EBIT-Net Interest Cover is a mere ~4.1x. And besides its >$2bn of net borrowings, @30 June 2017 Fletcher near-term, off-balance sheet liabilities of amounting to some $650m.)
