There's nothing like competitive tension to bring out the best price in an asset sale and shareholders in Brambles Limited (ASX: BXB) may be set to reap this benefit.
Private equity buyers are reported to be circling the logistics group's reusable plastic container business IFCO that Brambles intends to spin-off into a new listed entity, according to the Australian Financial Review.
Analysts believe the IFCO would be worth between $3 billion and $3.6 billion (based on the prevailing exchange rate) if the German headquartered business that supplies plastic crates to grocers for fresh food is to list on the ASX.
The valuation creates a base and the fact that several private equity and trade buyers have expressed interest in IFCO means Brambles might get an offer in excess of what IFCO could be worth as an ASX-entity.
The share price of Brambles is reacting positively to the news as it jumped 0.8% to $11.01 in early trade when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is down 0.2%.
That is great news for shareholders because management could use the proceeds from the sale to fund a share buyback or some other capital return program.
Handing back cash is the "in-thing" right now as a long list of large caps like BHP Billiton Limited (ASX: BHP), Stockland Corporation Ltd (ASX: SGP) and Adelaide Brighton Ltd. (ASX: ABC) are scoring points with investors through such a strategy.
But Brambles' shareholders shouldn't get too excited just yet. There's no certainty that a formal offer is forthcoming and even if there was one, it may not be in the interest of the company to accept it.
One reason why a bid could be rejected even if it valued IFCO on a higher multiple is tax. Selling a business at a profit will attract a capital gains tax liability while spinning-off a division into a newly created entity and distributing the new shares to existing shareholders through an in-specie distribution generally won't.
This won't stop cashed-up private equity buyers from trying though as they are hungry for new deals. IFCO fits the bill in many respects given its potential to expand more aggressively into Asia and Latin America.
The company said that sales to these two emerging markets hit 12% in the last financial year although that is on a small base.
But whoever owns IFCO will need fairly deep pockets as expansion won't come cheap – particularly in the US where the tyranny of distance between food producers and grocers is large.
IFCO owns a pool of around 300 million plastic containers and generated revenue of $1.1 billion in FY18. Brambles has not provided guidance for the current financial year.
Brambles is a buy in my book as I think the stock is attractively priced, particularly in light of the falling Australian dollar and the potential upside from the IFCO divestment.
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