Questions linger over Formica's value

BY GARETH VAUGHAN
Last updated 14:59 19/02/2009

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Fletcher Building is pushing ahead with merging its global laminated-board-making firm Formica with Australasian business Laminex, despite questions over Formica's value.

Chief executive Jonathan Ling said he hoped Formica, which last week posted an 86 percent drop in interim operating earnings to $2.9 million, would be in "pretty good" shape by August.

This follows the restructuring of North American operations under new Formica chief executive Mark Adamson.

At that stage, Fletcher will start to integrate Formica, its US$700m (NZ$1.37 billion) 2007 acquisition, with Laminex, including bringing the two under one management umbrella, combining product development and procurement and rationalising and standardising product ranges.

Despite Formica's poor performance, Fletcher did not write down its nearly $1b carrying value in last week's interim results, which showed a 27 percent group net profit fall to $172m.

Ling acknowledged that Fletcher and its auditors, KPMG undertook an impairment review which assessed three key criteria: Formica's outlook in North America, Europe and Asia; Fletcher's improvement plans for the business; and  mid-cycle earnings, meaning the average earnings over an entire business cycle.

Ling said Formica's earnings from 2004 to 2008,  which were "pretty good", were taken into consideration. No writedown was necessary, although this would be reviewed each time Fletcher reported  results.

However, some investors believe Fletcher should have just bitten the bullet, especially since a writedown was unlikely to impact on Fletcher's banking covenants.

Tyndall Investment Management joint domestic equities manager Rickey Ward, said it was hard to believe that Formica was worth what Fletcher paid for it. The carrying value should be trimmed by about one-third. Fletcher's Formica valuation includes assets at $518m, $303m of goodwill and $129m of branding.

"Assets around the globe have decreased [in value], so naturally you'd expect at least 20 percent off that", Ward said. "Then the rest of it is put your finger in the air sort of stuff as to whether there's any goodwill component left, given what the earnings have been or any brand value."

Fletcher is also fighting a claim from Cerberus Capital Management and Oaktree Capital Management, which sold Formica to Fletcher, in the Supreme Court of the State of New York. The two American private equity firms are seeking US$21m of earn-out payments on the deal, which Fletcher is refusing to pay.

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Ling insists Formica is still of long-term strategic value to Fletcher. It is just the timing of the buy, as the United States subprime crisis began, that was poor.

"It [Formica] has been around for 70 years, and it has weathered recessions and wars and all that sort of stuff. It's an icon brand pretty much around the world, and there's going to be a lot of opportunity for taking it to the next step," Ling said.

Combined, Formica and Laminex produced $1.06b of Fletcher's $3.7b group interim revenue but just $39m of its $303m in operating earnings.

Ling maintains, however, that the only change in Fletcher's plans for Formica since the deal was announced in May 2007, is that it is running 12 months behind schedule.

Once the global recession finally abates, Fletcher, as the global leader in laminated panels, should be in a prime position. "It's a niche but we'd be No 1, with good industry structures around the world. It will strategically be a terrific business."

In the meantime, with a major global recession rumbling on, Ward said all Fletcher could do with Formica was keep a lid on costs and work its assets hard.

"The fact that they've paid too much for it is another issue."

 

- BusinessDay.co.nz

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