Brickworks Ltd (ASX: BKW) shares have been a great investment over the decades. But, they seem on track to disappear from the ASX boards following the announcement of a merger between Brickworks and Washington H. Soul Pattinson and Co. Ltd (ASX: SOL).
I think the deal makes sense for both sides and should increase their underlying value and ability to generate cash flow. The market seems to like it, with the share prices of both businesses jumping higher compared to last week.
I'm pleased by the reaction, as a shareholder of both businesses. As I've already disclosed, Soul Patts was already my biggest portfolio holding before this announcement. After the rise and prospect of receiving more Soul Patts shares for my Brickworks shares, it's by far my largest position. It may mean I need to focus my new investment money on other ideas to reduce that portfolio concentration, though.
With the deal potentially getting sorted by the end of 2025, I think it's worthwhile reflecting on what I've learned as a shareholder of Brickworks shares. For me, there are (at least) three lessons.
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Institutions can see and unlock value
Over the years, I've written numerous times that Brickworks shares were trading significantly below their underlying value.
Sometimes, 'the market' can perennially undervalue a business compared to what it seems its underlying value truly is, even if it seems clear to you.
But it's not just regular investors and fund managers who buy shares. Institutional investors such as Soul Patts and private equity can make a takeover offer and help investors see that value become a reality.
If a business trades too cheaply, I wouldn't be surprised to see a takeover. We've seen it happen with businesses like Arcadium Lithium, Domain Holdings Australia Ltd (ASX: DHG), Elmo Software, and plenty more.
In my view, the smaller a business is, the more likely it is to attract takeover attention if it's undervalued.
Underrated factors can drive an ASX share
Brickworks may have been best known as a building product manufacturer. But, I think the best thing the company chose to do this century was to unlock value by building industrial properties on its excess land that it no longer needed. This helped Brickworks drive significant value within its business.
Some businesses have managed to deliver significant returns thanks to an obvious reason. But, we shouldn't underestimate the hidden/underrated characteristics of a business that are helping drive significant value.
While Brickworks was known for making bricks, it was the property segment that impressed me.
For a business like Commonwealth Bank of Australia (ASX: CBA), there are a number of factors that investors can point to for its success. I think its connection with customers is absolutely integral. In the three months to 31 March 2025, CBA said its proprietary mix for CBA home loans represented 68% of new business flows. In other words, CBA is not as reliant on mortgage brokers as other ASX bank shares. That helps with both customer loyalty and the net interest margin (NIM).
Another example for me is Rio Tinto Ltd (ASX: RIO). It may be best known as an iron ore miner, but copper is becoming an increasingly important part of the company's operations. I think copper will be a key driver of earnings in the coming years, making iron ore a smaller part of the pie.
Cyclical businesses can make great investments
Some ASX shares like Xero Ltd (ASX: XRO) are known for delivering (revenue) growth year after year.
But, other stocks like ASX mining shares and Brickworks built a reputation as demand for their products shifted during cycles. When share prices go through significant movements, it can be an opportunistic time to invest.
I did that a few years ago with Fortescue Ltd (ASX: FMG) shares, and I've also taken that opportunity with Brickworks shares. Each time there has been a slowdown in Australian residential construction, Brickworks shares have fallen, and I decided to jump on the business.
While Brickworks shares will disappear from the ASX boards, I think there are still plenty of attractive stocks, such as discretionary ASX retail shares, that can be opportunities when they sell off.
Hopefully, a combined Brickworks and Soul Patts can continue to deliver for investors.
