BXB 1.42% $11.11 brambles limited


  1. 2,602 Posts.
    Big changes required at Brambles
    December 14, 2009

    WITH the Brambles share price falling 20 per cent in the past two months, slashing more than $2 billion off its total value, new chief executive Tom Gorman is getting perilously close to turning the company into a takeover target.

    At least one investment bank is said to be running the numbers over the company - which is trading at less than half the price Toll Holdings was willing to buy it for back in 2007 and almost as low as its price back in April when Toll again toyed with the idea of a bid.

    This time the talk is that if the shares fall a bit lower, the numbers could work on a deal that could include a consortium of private equity operators and Toll.

    Indeed, if the stock falls much further than its current share price of $6.34, an Asian logistics company might well take an interest in the world's biggest pallet supplier.

    Naturally the preference for shareholders, and for Gorman and the board, is to restore value. But to do that will require bigger changes than its current commitment to fixing the US operations and rediscovering customers.

    Speculation inside the company is that in the next week or so Gorman will unveil a new senior leadership structure, which will sweep away the structures created by his predecessor Mike Ihlein.

    He will reconfigure the top leadership team and announce replacements for some key departures.

    This will include the appointment of a new group president for CHEP Asia Pacific, following the sudden departure of Craig Van Der Laan, and a new head for CHEP Europe, who is expected to be Peter Mackie. Soon after, the head of the troubled CHEP US, Kevin Shuba, is expected to move on, leaving a brand new senior executive team.

    The next big change is expected to be the sale of its $2 billion records management business, Recall.

    Recall is non core, represents less than 15 per cent of group earnings, has no synergies with the rest of the group's business and will increasingly become a distraction as the company focuses on fixing CHEP in the US and growing its CHEP emerging markets business. If Recall was put out for tender - most likely in the second quarter of next year - it would not be short of offers.

    Private equity groups including Kohlberg Kravis & Roberts have expressed interest in Recall in the past, and Iron Mountain, which is the world's biggest records management business, would take a close look.

    Iron Mountain made its first move into the Asia-Pacific region with the $US86 million ($A94 million) purchase of Pickfords Records Management in Melbourne. But a restructuring of management, a turnaround in its US business and the sale of its last non-core business won't be enough to return Brambles to those erstwhile days of high price to earnings multiples.

    The brutal reality is Brambles has allowed competitors to emerge and with that genie now out the bottle, it will have to fight on price and innovation, and that costs money.

    In addition, with many Brambles customers struggling to make a profit margin of 5 per cent, it doesn't sit well when they look across at Brambles' margins and see numbers in the 25 per cent or higher. The margin squeeze is on.

    For Gorman this means taking a more aggressive approach to growing the business. The upshot is we are likely to see Gorman pushing Brambles into new emerging markets, releasing new types of CHEP products, and depending on how brave he is, making bets on new technology.

    Brambles recently launched its CHEP pallet business in Turkey, bringing the number of countries it operates in to 45 markets.

    It has also developed fresh food black reusable plastic crates, and is moving into beverage trays for Aldi.

    He will have to do this as he juggles the US business, and tries to fend off a big competitive threat from iGPS, which continues to take customers from Brambles and last week appointed the former chief executive and chairman of Kellogg Company, Carlos Gutierrez, to its board. In the pallet hiring game it is all about relationships and so the appointment of Gutierrez would have sent chills down the spine of the Brambles board.

    Investors and clients take iGPS seriously because it is headed by former senior CHEP executive Bob Moore and former Brambles chief executive John Fletcher, who is on its board.

    Its seriousness grew when it snared the Quaker, Tropicana and Gatorade units of PepsiCo from Brambles and Kraft and at least three other big customers moved a portion of their pallet needs from Brambles, to iGPS, which supplies plastic pallets rather than Brambles' wooden pallets.

    If all this isn't enough, Gorman also needs to restore market confidence in the company.

    As one fund manager said recently: ''One of the challenges the company has is the lack of trust the market has in the company after a number of problems they've had in the past couple of years communicating. Gorman needs to do better at this.''

    If he fails, the company will join the growing pile of cheap takeover target files.
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