Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) shares and Brickworks Ltd (ASX: BKW) shares are soaring today after announcing a merger. Soul Patts shares are up 12% and Brickworks shares are up 20%.
The leadership teams of the two businesses have both approved the deal, which is a good sign that everyone is a winner.
The investment house and the building product manufacturer have been close partners for decades, but soon enough they'll be one merged business. Together, they are a much larger company. But what are the benefits? And are there any negatives?
Positives of the merger
Shareholders of each business will benefit in somewhat different ways.
Let's start with the larger business, Soul Patts. This combination is expected to lead to an increase in the net asset value (NAV) on a per-share basis for Soul Patts shareholders. It should also lead to an increase of net cash flow from investments on a per-share basis.
It will increase the portfolio weighting towards private markets and property, further diversifying the portfolio, which is one of the main strengths of Soul Patts, in my view.
With the ownership of Brickworks' assets, the company will get to capitalise on the tailwinds of e-commerce growth (with the industrial property portfolio), an undersupply in housing (with the building products business), and the reduction in interest rates.
Finally, the investment house will gain further financial flexibility, creating further opportunities for new investments.
Turning to Brickworks, it will benefit from the premium being paid for its shares. At the time of the announcement, the implied premium was 10.1%. But on day one, the Brickworks share price has jumped much more.
For Brickworks, it should also lead to a boost for the NAV on a per-share basis, as well as a cash flow boost on a per-share basis.
Shareholders of the building product manufacturer will gain stronger exposure to a more diversified portfolio, providing protection in economic downturns and strong cash flow generation.
The companies should also benefit from ongoing dividend stability. It was noted that Soul Patts has increased its ordinary dividend every year since 2000.
Negatives
With how both businesses appear to be winners from this merger, the negatives are fairly limited.
Some investors may have wanted Brickworks to stay a separate entity, allowing them to still have an effective way to invest in industrial properties and construction – that exposure will be diluted.
I also hope that Soul Patts will be able to continue executing on growing the industrial property portfolio, as that was a key driver of value for Brickworks. I believe there is considerable potential in Brickworks' property pipeline.
There could have been a negative tax consequence for shareholders if this were treated as a regular takeover, but both businesses have stated they expect Australian shareholders to be able to receive scrip-for-scrip rollover relief. So, tax doesn't appear to be a negative.
Finally, as an investor hoping to invest in more Soul Patts shares for years to come, it's a shame the share price has jumped so much today because it's not as cheap as last week!
Overall, I think this is a very good idea for both sets of shareholders, and I think the merger has merit.
