Assuming brick-like trajectory

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    Here is another market darling that is showing signs of going into reverse.

    Lower lows and lower highs. Latest from Brickworks may take any takeover premium out of the shareprice which already seems to be factoring in lower building activity.

    Following article from todays Financial Review.

    Brickworks: Bristile not a target
    Jun 25
    Peter Klinger

    Brickworks chairman Robert Millner said yesterday that it did not intend to creep further up rival brickmaker Bristile's share register.

    His confirmation, in response to a question from The Australian Financial Review, is not expected to have a material impact on Bristile's share price. But it adds an interesting piece to what is shaping up as an intriguing puzzle.

    Brickworks, the parent of Austral Brick Co, has a 21.9 per cent stake in Bristile, the country's second-biggest brickmaker that runs its operations out of Perth.

    Almost every analyst who has looked seriously at Bristile believes Brickworks will fold Austral into Bristile. This would form an Australian brick giant and topple Boral off the number one position.

    The only question remains when?

    The last time Brickworks topped up its holding in Bristile it was prepared to pay $3.01 a share.

    That was in April, and the sellers were Bristile's managing director, David Gilham, and his finance chief, Paul Depiazzi.

    Since then, Bristile's share price has come off 17 per cent in line with general market weakness (Brickworks has also eased) and yesterday closed at $2.53.

    Based on analysts' forecasts of a net profit of about $36million for the year to June 30, Bristile is trading on a forecast earnings multiple of just over 10.

    Brickworks could start its creeping process in October, but Mr Millner made it clear yesterday his board had no intention of doing so.

    He would not reveal why and neither he nor Mr Gilham would comment on whether a Bristile-Austral merger was being discussed between the two parties.

    But there is growing speculation among market watchers in Perth that Mr Gilham will soon force the issue by returning to shareholders strong cash flow, or use his conservative balance sheet to launch another share buyback.

    According to the theory, Brickworks would then be faced with either an additional return on or appreciation of its investment, or would have to react by proposing an Austral merger.

    "It just means that if they [Brickworks] want to creep and eventually take over Bristile, they would prefer to have that cash in the [Bristile] business rather than in shareholders' hands," said Paterson Ord Minnett analyst Robert Gee. He said he believed Bristile could strip between $50million and $100million out of its business without greatly impacting the health of its balance sheet.

    In a note earlier this year, UBS Warburg's Owen Evans looked at a likely Bristile acquisition of the Austral business, which he valued at $200million. (Bristile's market capitalisation is $378million.)

    According to Evans' scenario, Brickworks could add $50million to $100million of land to Austral, so that the total cost to Bristile would be up to $300million.

    The acquisition could be done on a one-third equity, two-thirds debt basis, given Bristile's healthy balance sheet.

    Bristile's gearing level is 48 per cent and falling, while debt has been reduced from about $160million to $90million, following its $150million acquisition in late 1999 of Pioneer's Victorian, South Australian and Tasmanian brick assets.

    UBS's Mr Evans has tipped modest, immediate synergies of $4million from combining Austral and Bristile, given that the two companies operate in different states.

    But he would expect operational efficiencies to offer more tangible benefits, which Mr Gilham has already proved with the strong return from the Pioneer brick assets.

    Even though residential building activity levels are expected to slow next financial year, Mr Gilham has made it clear he expects to at least match the 2001-02 profit, in part due to a maiden full-year contribution from its smaller Pioneer roof tiles acquisition.
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