CSR Limited (ASX: CSR) and Boral Limited (ASX: BLD) have proposed a joint venture to combine their brick operations on the east coast of Australia. Operations in New South Wales, Victoria, Queensland, South Australia, Tasmania and the ACT will be united. Completion of this transaction is subject to clearance by the Australian Competition and Consumer Commission, however, it is reasonable to expect that the proposal will be given the go ahead in the near future.
The proposed joint venture will be owned 60% by CSR and 40% by Boral, reflecting the relative valuation of the two businesses. There is no cash consideration as part of the proposed joint venture.
Boral is an international building and construction materials company headquartered in Sydney. Boral’s core businesses are cement and construction materials in Australia, plasterboard in Australia and Asia, and bricks and roof tiles in Australia and USA. CSR manufactures and supplies building products in Australia and New Zealand.
Brick demand in Australia has experienced a sustained structural decline, with bricks becoming an increasingly smaller component of the broader cladding market. Total brick production, measured in units of bricks, is down 46% from the peak in 1981. Lower brick demand has resulted in declining capacity utilisation, reduced profitability, plant curtailments and closures. The proposed partnership will enable both companies to access additional operational and overhead efficiencies that would otherwise be unavailable to the parties acting on their own. With combined revenue in the order of $230 million, initial overhead savings of $10 million per annum are expected following the integration of the businesses.
Rationalisation of their brick businesses will enable Boral and CSR to deliver the following efficiencies
- Consolidation of overhead costs including sales, administrative and marketing.
- Development of more efficient freight and distribution networks.
- Potential rationalisation of several land assets.
Both CSR and Boral are well positioned to benefit from the recent, and expected, increase in housing approvals in Australia. The joint venture will lower costs for both companies. As revenues rise and costs are reduced, profits will improve. I would look to further efficiencies for either or both companies, through more partnership ventures or other means, and then consider buying shares in CSR or Boral for long-term growth.