Will Washington H Soul Pattinson and Brickworks divorce?

There is a brawl brewing between some of Australia’s most influential investors. Mark Carnegie and Matt Williams have joined forces in an attempt to force Brickworks (ASX: BKW) to cancel its shares in Washington H Soul Pattinson (ASX: SOL). Brickworks owns 42% of Washington H Soul Pattinson (referred to here as WHSP) and WHSP owns 44% of Brickworks. This arrangement has lasted over 40 years, a reasonably long-lasting pairing by today’s standards.

Members of the Millner family (descendants of one of the founders) are likely to resist this proposal. Mark Carnegie heads an eponymous fund, and Matt Williams is head of equities at the listed fund manager Perpetual (ASX: PPT). According to Carnegie, “there is more than $1 billion in value not being recognized by the share market across these two companies.” The agitators also want WHSP to distribute its 26.9% stake in telecommunications company TPG Telecom (ASX: TPM). But is a split in the interests of long-term holders?

I don’t think so. A sudden increase in the companies’ share prices would mostly benefit shareholders who wanted to sell and funds that would then be able to boost their reported results (in the short term, at least).  At present, it seems likely the conflict will end up in court, since the agitators need to exclude WHSP from exercising its right to vote its Brickworks shares. If the chairman of WHSP, Robert Millner, does fight the proposal, it will be further evidence that the Millner family has its interests aligned with long-term shareholders.

The beauty of WHSP in its current form is that it has diverse holdings and is able to return large amounts of money to shareholders every single year, even when some of its holdings are suffering a temporary depression in earnings. This makes it an attractive holding for long-term investors who don’t want to have to worry about the company going bust, and who want to receive a dividend every year. Brickworks’ holding in WHSP allows it to easily weather downturns in housing construction. This is an advantage because Brickworks can re-invest in its business, even when construction is in the doldrums.

It is not unreasonable to suggest that once the cross holding is unwound, the activist shareholders would not be satisfied with the TPG Telecom shares alone. I think TPG is just the first company they would strip from Washington H Soul Pattinson. As an aside, I think that those shares are likely to outperform most of WHSP’s portfolio in the coming years.

Long-term holders might find themselves with an immediate profit, but the company they originally invested in would have disappeared. The Millners, the family that controls WHSP has proven to respect their retail shareholders; most retail shareholders would be glad to keep them. The company is one of the oldest and strongest on the ASX, and continually grows its dividend.

One bit of good news is that Ron Brierley, who attempted to unwind the cross holding in 2000, has predicted that the current effort will also fail. According to the Australian Financial Review, he has said that although the cross holding is “absolutely wrong in principle,” unwinding it is “not a priority” because “they’ve done sufficiently well over the past 12 years”.

Foolish takeaway

I have previously suggested that readers should consider buying shares of Washington H Soul Pattinson. I also think that current management is honest and competent. Although the share price is up on the news of the potential split, I do not believe that such a change would be advantageous to long term holders.

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Motley Fool contributor Claude Walker does not directly own shares in any of the companies mentioned in this article, but has an interest in TPG Telecom through a managed fund. 

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